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Why CrowdStrike Stock Crumbled by More Than 10% Today

By Rich Smith – Nov 15, 2021 at 11:18AM

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Morgan Stanley dinged the cybersecurity stock, but it doesn't dislike it as much as you might think.

What happened

Shares of cybersecurity company CrowdStrike (CRWD -2.04%) got tackled for a loss Monday morning. Its shares had tumbled by 10.5% as of 10:37 a.m. EST.

You can thank Morgan Stanley for that.

White arrow declining sharply atop a stock tickertape display bathed in red

Image source: Getty Images.

So what

Bright and early Monday morning, investment bank Morgan Stanley initiated coverage on CrowdStrike with an underweight (i.e., sell) rating and a $247 price target that implies the stock has another $7 or so to fall from here before it reaches fair value.

The "potential for decelerating revenue growth" and the stock's valuation of approximately 26 times its 2023 sales "creates an unfavorable risk-reward," warned analyst Hamza Fodderwala in a note covered by today. Furthermore, CrowdStrike's first-mover advantages appear to be fading as its rivals' next-generation endpoint detection and response offerings catch up to it in terms of capability -- and as its peers offer those services to customers for at least 15% to 20% less. 

Long story short, Fodderwala forecasts that CrowdStrike's revenue growth will decelerate through 2022.

Now what

But now here's the weird thing: After warning so strenuously about CrowdStrike's prospects, the Morgan Stanley analyst actually ended up concluding that the stock trades for only "a slight premium" relative to the average valuations within the cybersecurity space. What's more, while Fodderwala said he anticipates seeing "relatively lower estimate beats going forward," he still thinks CrowdStrike will keep beating estimates in future quarters.

Call me crazy, but that actually doesn't sound like half-bad news for CrowdStrike shareholders. While I admit the stock's valuation of 170-times-free-cash-flow looks more than rich to me, the potential for continued earnings beats -- a potential now affirmed by a CrowdStrike "bear" -- suggests to me that this stock could continue to power higher despite Morgan Stanley's sell rating.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends CrowdStrike Holdings, Inc. The Motley Fool has a disclosure policy.

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