What happened
Investors in CrowdStrike (CRWD +3.18%) are doing the wave Monday afternoon as shares of the cybersecurity expert surge 5.2% in afternoon trading, 2:20 p.m. ET.
They can thank Morgan Stanley (MS) for the gains.
Image source: Getty Images.
So what
This morning, investment megabank Morgan Stanley upgraded shares of CrowdStrike to "overweight" (a compliment on Wall Street that means the stock is predicted to do better than its market) and raised their price target to $215 per share, as StreetInsider.com reports.
Morgan Stanley praised CrowdStrike as the "leading cybersecurity franchise" in a growing market with "durable" demand for cybersecurity. Valuation-wise, the banker sees a buying opportunity in the fact that CrowdStrike stock is still down 30% from its mid-April high, despite gaining back 21% over the past two weeks.
Now what
But is even 30% less than the April price a bargain?
Morgan Stanley argues that it is, because the stock is selling for "38X EV/CY23FCF." Translation: The stock is selling for 38 times the free cash flow (FCF) the company might earn in 2023. Based on the analyst's expectation that CrowdStrike will keep growing at 50% annually, at least in the near term, MS thinks that makes CrowdStrike a bargain. But consider the following:
Most analysts who follow CrowdStrike see the stock growing a bit slower than 50% over the next five years; 41% annually is the consensus. And based on $503 million in trailing FCF, CrowdStrike is selling for closer to 75 times FCF currently, resulting in a price-to-FCF-to-growth ratio of about 1.8.
That's not really a cheap price, and it will be even more expensive if the widely rumored recession that's coming slows down the company's growth rate in the next year or so. While I agree that CrowdStrike is growing like a proverbial weed at present and costs a whole lot less now than it did two months ago, the stock still isn't cheap enough to offer value investors a decent margin of safety.
