What happened
Shares of CrowdStrike (CRWD 3.86%) were trading higher on Monday. The cloud-based cybersecurity specialist jumped as much as 5.1% in early trading. By the time the market closed, the shares were still up 2.9% compared to Friday's close.
CrowdStrike was on the receiving end of an analyst upgrade, helping fuel the stock's advance.
NASDAQ: CRWD
Key Data Points
So what
Investment bank Morgan Stanley raised its price target on CrowdStrike to $150, up from $135. This represents potential gains for investors of 28% compared to its closing price on Friday. At the same time, the team maintained its overweight (buy) rating on the stock.
Analysts noted that CrowdStrike "quickly went from a consensus favorite to a key battleground stock entering 2023." That said, Morgan Stanley believes Wall Street has become "overly bearish" in its view, providing long-term investors with a compelling opportunity. The analysts cited CrowdStrike's expanding addressable market, large installed base of users, and its lead in "AI-driven threat detection" as driving durable annual recurring revenue (ARR) of 25% to 30%.
Now what
The investment bank could be on to something. In the third quarter (which ended Oct. 31), CrowdStrike delivered revenue of $581 million, up 53% year over year. Additionally, ARR -- which forms the baseline for future performance -- climbed 54%, which shows that its growth spurt may not be over.
At the same time, its generally accepted accounting principles (GAAP) loss per share of $0.24 was comparable with the prior-year period. Perhaps more importantly, however, CrowdStrike generated operating cash flow and free cash flow of $243 million and $174 million, respectively. This suggests that consistent profitability is only a matter of time.
Given CrowdStrike's total addressable market, which management estimates at nearly $98 billion by 2025, the company has a long runway ahead.
While some investors might balk at paying 7 times next year's sales -- when a reasonable price-to-sales ratio is generally between 1 and 2 -- valuation cannot be viewed in a vacuum. Analysts' consensus estimates are calling for revenue growth of 36% in 2023, on top of 53% growth in 2022, but that could end up being conservative. CrowdStrike has a history of defying analysts' lowball growth estimates, so its results over the coming year will likely be higher than expected.
For all those reasons and more, CrowdStrike is a buy.
