CrowdStrike Holdings (CRWD) announced strong revenue and free cash flow (FCF) results on Nov. 26. However, CRWD stock has already risen in anticipation. Is it fully valued? Possibly, but its FCF and margins are still strongl.
As a result, one way to play this is to sell short out-of-the-money (OTM) put options to set a lower buy-in target price. This article will discuss how to do this.
CRWD is trading at $349.21 in midday trading on Tuesday, down from a peak of $372.26 just before earnings results on Nov. 22. But this is well up from its recent low of $242.25 on Sept. 11.
I discussed how CRWD stock could be worth $325.73 in my Oct. 6 Barchart article, “CrowdStrike Holdings is a Favorite of Analysts - CRWD Price Targets Keep Rising," and a Sept. 15 article.
So, is it overvalued now that the stock has risen over this price target? After all, analysts have raised their price targets.
For example, Yahoo! Finance reports that the average of 53 analysts is now $373.09, up from $325.14 just about two months ago. Moreover, AnaChart shows that 41 analysts covering the stock have an average of $380.21, up from $333.92 on Oct. 6.
Let's analyze CrowdStrike's earnings and FCF results to set a price target.
Q3 Cash Flow and FCF Margins
CrowdStrike's quarterly revenue exceeded $1 billion for the first, time, a surprise rise, and up 29% YoY. Moreover, its cash flow from operations (CFFO) rose 19.2% from $273.5 million in last year's Q3 to $326.1 million.
However, its CFFO margin (i.e., CFFO/revenue) fell slightly from 34.8% last year to 32.3% this year. In addition, its free cash flow (FCF) fell as a result of this lower CFFO margin and also higher capex spending.
That can be seen in the table above. It shows that the net result was a 23% FCF margin in Q3, down from 30% a year ago, and a 9-month 29% FCF margin, down from 30%.
So, despite the higher revenue, the company is generating less free cash flow as a proportion of revenue, even though the dollar amount is rising.
That could have a dampening effect on its valuation.
Setting a Price Target
CrowdStrike raised its full-year revenue guidance for the year ending Jan. 2025 to $3.9305 billion, up slightly from $3.9022 billion last quarter. That will not affect our valuation much since most of that is already discounted by the market in today's price.
We need to look further out. For example, analysts now project next year sales (for the year ending Jan. 2026) will be $4.78 billion. But this is down slightly from prior forecasts, as seen in my earlier article, of $4.79 billion.
Moreover, in my earlier articles I assumed the company would make an annual FCF margin of 30%. That no longer seems possible, given the company's lower FCF margin performance this past quarter.
So, let's assume that next year CrowdStrike will make a 28% FCF margin on $4.78 billion in sales. That means FCF next year will be $1.338 billion:
FCF = 0.28 x $4.78 b = $1.3384 billion
Let's assume the market is willing to give this figure an FCF yield of 1.50% (improved from my earlier 1.80% FCF yield metrics). That results in an $89.2 billion market cap, only slightly higher than today's market cap:
$1.3384 b / 0.015 = $89.2 b forecast mkt cap
$89.2 b forecast mtk cap / $86.15 b mkt cap today = 1.0354 = +3.54% higher
In other words, CRWD stock is worth only 3.54% more, or $368 per share.
The bottom line is that even using a higher valuation metric we can only see a 3.5% higher price target. So, it's possible that CRWD stock may be close to its fair value.
Nevertheless, one way to play this that could be profitable is to sell short out-of-the-money (OTM) put options.
Shorting OTM Puts
For example, the Dec. 27 expiry period, slightly over 3 weeks from now (24 days), shows that OTM put yields are high.
The $335 strike price put options, which are over 4% below today's trading price with a low delta ratio, has a bid-side premium of $5.30 per put contract.
That means that a short seller of these puts can make an immediate yield of 1.58% (i.e., $5.30/$335.00 = 0.01582).
Here is what that means. An investor who secures $33,500 in cash or buying power with their brokerage firm can enter a trade to “Sell to Open” one put contract at this strike price.
Then the account will immediately receive $530.00. Hence, the 1.58% yield (i.e., $530/$33,500 invested).
Moreover, the account will keep this income no matter what happens. As a result, even if the stock falls to $335.00 in the next three weeks, the investor's cash will be used to buy 100 shares, but the breakeven price will be lower:
$335 - $5.30 received = $329.70 breakeven
That is about 6% below today's trading price. As a result, there is good downside protection. And even if CRWD falls to this level, the investor knows there is a potential upside in the stock, using analysts' target prices as a guide.
The bottom line here is that one way to play CRWD stock, even if it is fairly valued or close to it, is to sell short out-of-the-money (OTM) puts.
