In a gutsy move, a Wells Fargo analyst increased his price target for cybersecurity specialist CrowdStrike (CRWD 2.03%) days before the company's fiscal second-quarter earnings release. Ahead of the report, which is scheduled for Wednesday, Wells Fargo's Andrew Nowinski is boosting his 12-month target for the tech stock by about 14%. Additionally, the analyst reiterated an overweight rating (similar to a "buy" rating) on the stock.
Is Nowinski on to something? Or is it wiser for investors to wait for more information, available when the earnings report is released, before deciding whether or not they think the stock is a buy?
The path to $200
On Monday, Nowinski said he believes the risk-reward setup headed into the report is attractive. In other words, the analyst is likely betting that CrowdStrike reports better-than-anticipated fiscal Q2 financial results. More specifically, Nowinski said he expects the company to report net new annual recurring revenue (ARR) of $200 million.
To help investors understand Nowinski's bullishness, achieving $200 million in net new annual recurring revenue during the quarter would be an impressive achievement, since the company only added $174.2 million in net new ARR in the quarter ended three months earlier. Still, there's always a risk that CrowdStrike will miss Nowinski's estimate.
Nowinski's view corroborates the momentum the company said it had in the fiscal first quarter. CrowdStrike's $174.2 million in ARR during the period was ahead of management's stated assumptions.
"In Q1, we closed over 50% more deals involving eight or more modules compared to a year ago," explained CrowdStrike CEO George Kurtz in the company's fiscal Q1 earnings call. He said this "speaks to increasing customer demand for consolidation using the Falcon platform." Given this momentum and the company's strong pipeline for fiscal Q1, Kurtz said the company had confidence in its ARR growth potential during the second half of the year.
Analysts, on average, expect fiscal Q2 revenue to grow 35.4% year over year to $724 million. Anything less than this could substantially lower the odds of CrowdStrike stock reaching $200 within 12 months.
Wait and see
Despite this analyst's bullishness and his confidence in the stock's near-term potential, it may be wise for investors to get more data on the company's recent trends before they pile into the stock. The stock's sky-high valuation, evidenced by its market capitalization of $34 billion even as the company continues reporting losses, means that investors already have rosy expectations for the company's long-term growth. It may make sense, therefore, to wait and see if the stock pulls back further at some point -- whether that's in the days following the earnings report or at some point further down the road.
Sure, there's always a risk that this is the lowest the stock will ever trade from here on out. But given how volatile the stock is, and considering its pricey valuation, it's unlikely that investors won't get a chance to buy it at a better price at some point.
Whatever happens to the stock in the near term, CrowdStrike's decelerating year-over-year revenue growth rates are reason to be skeptical about the company's potential relative to the stock's valuation. Investors may want to look for concrete signs of stabilization in its growth rate before considering paying such a high price for the stock.
Investors will get an update on CrowdStrike on Wednesday, after market close, when the company reports fiscal Q2 results.
