Calculating The Fair Value Of CrowdStrike Holdings, Inc. (NASDAQ:CRWD)

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, CrowdStrike Holdings fair value estimate is US$425
• With US$340 share price, CrowdStrike Holdings appears to be trading close to its estimated fair value
• Analyst price target for CRWD is US$399 which is 6.0% below our fair value estimate

In this article we are going to estimate the intrinsic value of CrowdStrike Holdings, Inc. (NASDAQ:CRWD) by estimating the company's future cash flows and discounting them to their present value. Our analysis will employ the Discounted Cash Flow (DCF) model. It may sound complicated, but actually it is quite simple!

We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.

View our latest analysis for CrowdStrike Holdings

The Model

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) forecast

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF ($, Millions)	US$931.4m	US$1.28b	US$1.68b	US$2.25b	US$3.14b	US$4.23b	US$5.07b	US$5.81b	US$6.44b	US$6.98b
Growth Rate Estimate Source	Analyst x29	Analyst x28	Analyst x26	Analyst x8	Analyst x4	Analyst x4	Est @ 19.78%	Est @ 14.56%	Est @ 10.90%	Est @ 8.35%
Present Value ($, Millions) Discounted @ 7.0%	US$871	US$1.1k	US$1.4k	US$1.7k	US$2.2k	US$2.8k	US$3.2k	US$3.4k	US$3.5k	US$3.6k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$24b

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.4%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 7.0%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = US$7.0b× (1 + 2.4%) ÷ (7.0%– 2.4%) = US$156b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= US$156b÷ ( 1 + 7.0%)¹⁰= US$80b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$103b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of US$340, the company appears about fair value at a 20% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.

The Assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at CrowdStrike Holdings as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 7.0%, which is based on a levered beta of 0.996. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

SWOT Analysis for CrowdStrike Holdings

Looking Ahead:

Valuation is only one side of the coin in terms of building your investment thesis, and it is only one of many factors that you need to assess for a company. The DCF model is not a perfect stock valuation tool. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For CrowdStrike Holdings, we've put together three essential aspects you should further examine:

1. Risks: Case in point, we've spotted 2 warning signs for CrowdStrike Holdings you should be aware of.
2. Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for CRWD's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
3. Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!

PS. Simply Wall St updates its DCF calculation for every American stock every day, so if you want to find the intrinsic value of any other stock just search here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.