As investors pile into tech, CrowdStrike (CRWD 2.03%) has been a major beneficiary this year. The stock is up a whopping 52% year to date.
Though the Nasdaq Composite's 32% gain during this period has certainly helped, the company has also likely stood out more than some other tech companies due to growing interest in artificial intelligence (AI) and cybersecurity -- both of which are key to CrowdStrike's business model.
CEO George Kurtz noted in the company's first-quarter earnings report last month that its ability to leverage AI "to drive better security outcomes" is one of the key factors in the company's growth.
Just as investor optimism builds for the stock, analysts' rosy comments are growing, too. One analyst this week initiated coverage of the stock with a $200 12-month price target. Is this analyst on to something or is the market's loud applause for the stock a signal for prudent investors to exercise more caution?
The path to $200
Shares of CrowdStrike are likely to increase to around $200 over the next 12 months, according to KeyBanc analyst Eric Heath. Initiating coverage on the cybersecurity company this week, Heath said the stock could see an incredible 25% upside during this period. This is particularly impressive considering that shares have already risen 52% this year.
The analyst's bullishness comes down to the company's positioning to potentially benefit from customers consolidating their security spending with large, scaled-up cybersecurity players. Heath believes that CrowdStrike could be a major beneficiary of this trend because it is the leading pure-play endpoint vendor, citing the company's more than two dozen modules, or security-related subscription services.
During CrowdStrike's first-quarter earnings call, Kurtz discussed the company's market share gains from legacy players as companies consolidate their cybersecurity spending. It's still a very fragmented market, he said, but he feels good about the opportunity to continue gaining market share.
The growing demand for cybersecurity services and companies' consolidated spending on it have driven sales. First-quarter revenue rose 42% year over year to about $692 million. And there's been increasing adoption of CrowdStrike's security modules, with 23% of its customers paying for seven or more.
But what about valuation?
Despite all of this exciting news, investors should still raise an eyebrow at the company's valuation. A $38 billion market capitalization for a company that just barely crossed into profitability requires bold forecasts for growth in order to justify this valuation. Even based on the expected adjusted profit for fiscal 2024, shares are expensive. They trade at 66 times the high end of management's guidance range for this fiscal year's adjusted earnings per share.
So, is $200 in 12 months possible? Probably. But investors should keep in mind that this is a high-risk stock. The current valuation requires CrowdStrike to keep aggressively taking market share and making rapid progress toward improved profitability.
