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CrowdStrike Holdings (CRWD) stock has stabilized since the cybersecurity company's software crash this summer. This is partly because its recent quarterly earnings were strong. CRWD stock is now a favorite of contrarians, value investors, and short-put investors. The reason is CRWD is worth substantially more than its present price, up over 25% at $325 per share. This article will describe why.
CRWD closed at $259.13, up 19% from its recent low of $217.89 on Aug. 2. Moreover, in the last month, it has appreciated 4.4% from $248.11, although it's still well off the peak of $390.71 on July 8.
I discussed CRWD stock's attractiveness to contrarians, value investors, and short-put players in my Aug. 19 Barchart article, “CrowdStrike Could be a Good Contrarian Play Ahead of Its Earnings Next Week.” Since then the company produced excellent results (see below).
How Things Turned Out
I suggested selling short CRWD's near-term out-of-the-money (OTM) put options to take advantage of its weakness. The Sept 6 put options had high premiums, providing a good income play and to buy in at a lower price.
For example, the $242.50 strike price put options (9% below the $266 spot on Aug. 19) were juicy. This represented a $6.25 premium or a 2.577% yield (i.e., $6.25/$242.50).
As it turned out, the options expired worthless since on Sept. 6, three weeks later, CRWD stock closed at $246.39 - well over the $242.50 strike price for the puts. This means that the investors made a clean 2.577% yield.
This trade can also be repeated for additional income. It also works well for investors who hold CRWD as a long investment, although that's not needed for short OTM puts. But first, let's look at what's happened in the last several weeks.
Strong Financial Results - Huge Free Cash Flow
On Aug. 28 CrowdStrike reported its Q2 quarterly revenue rose 32% YoY to $963.9 million, including $918 million in subscription revenue, up 33% YoY.
Moreover, the company guided for a strong fiscal year at $3.89 billion to $3.9 billion. That is only a few million down from prior guidance and essentially means the software crash will have little long-term effect, especially on its cash flow.
For example, during Q2 the company generated a 28% FCF margin (i.e., FCF/sales) from $272.2 million in FCF, which was 44% higher than last year. The FCF margin last year was lower as well at just 26%. Moreover, for the first half its FCF margin was 32% vs. 29% a year ago.
This strong performance will lead to higher FCF projections next year. For example, analysts now project $4.79 billion in sales for 2025 (year ending Jan. 2026). That is 22.8% higher than this year's estimate of $3.9 billion in sales.
Moreover, if FCF margins stay strong at roughly 30%, CrowdStrike could generate $1.437 billion in FCF next year (i.e., 0.30 x $4.79b). That will push the value of CRWD stock higher. Here's why.
Target Price for CRWD Stock
For example, CrowdStrike presently has an FCF yield of about 1.8%. This is because in the last 12 months (LTM) the company has generated $1.167 billion in FCF, according to data from Seeking Alpha. Since CRWD's present market capitalization is $63.5 billion, that means that $1.167/$63.5b works out to a 1.84% yield.
Therefore, taking our projection of $1.437 billion in FCF for next year, using a 1.80% FCF yield (i.e., slightly lower due to the higher FCF numbers) leads to a market cap estimate of almost $80 billion (i.e., $1.437b/0.018 = $79.83b).
That market cap projection is over 25% higher than today's market value (i.e., $79.83b/$63.5b -1 = 0.257, or +25.7%). As a result, CRWD stock is worth 25.7% more than today's price of $259.13, or $325.73. This 12-month price target assumes CrowdStrike will generate 30% FCF margins with 22.8% higher revenue next year.
Analysts tend to agree that CRWD stock is undervalued. For example, Yahoo! Finance reports that 42 analysts have an average price target of $322.27. Similarly, Barchart's survey shows a mean price target of $326.29.
Moreover, AnaChart.com, a sell-side analyst tracking site, shows that the average of 42 analysts is $303.16, or 17% over the close on Friday, Sept. 13. The table below shows that many analysts have raised their price targets in the last two weeks and they are all well over $300 per share.
Note that the Price Targets Met Ratio stats for these analysts (i.e., their track records - how well they have met their price targets) are all well over 50% and some are 90%. That should give investors a good sense that these analysts are all very bullish on CRWD stock right now.
One way to play this, as mentioned earlier, is to sell short out-of-the-money put options. That is a way to make extra income (CRWD stock does not have a dividend) as well as a lower buy-in price target.
Shorting OTM Puts in CRWD Stock
For example, look at the Oct. 4 expiration period, 3 weeks from today. It shows that the $240.00 strike price put options have a premium on the bid side of $3.10 per contract. That strike price is out-of-the-money (i.e., below the spot price) by over 7%. And the premium of $3.10 represents a yield of 1.29% on the $240 strike price.
This means that for by securing 2,400 in cash with a brokerage firm, an investor can make $31.00 for every put contract shorted. So, for 10 puts, the investor secures $24,000 and makes an immediate yield of $310.00. Either way, the yield is 1.29% over 3 weeks.
The only obligation is to buy 100 shares per contract if the stock falls to $240.00 on or before Oct. 4. Otherwise the investor now only keeps the income but has no obligation to buy shares at that price.
This yield allows the investor to make an expected return of over 5% in the next quarter. This is because if the investor can repeat this trade 4 times they can make $5.166% (i.e., $31 x 4 = $124 per contract / $2,400 invested over that period).
This is also why it probably makes sense now to buy CRWD stock as well as short OTM puts. That way the investor gets to keep any upside in the stock as represented by its higher price target discussed above.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
