(“What’s a lukewarm take?” you ask – well, it’s definitely not a hot take – we would like to think it’s a more considered, insightful, and useful take on the news.)
CrowdStrike illustrates the risk that comes with highly valued stocks
The market is punishing CrowdStrike ( Nasdaq: CRWD ) after the company reported slightly better-than-expected third-quarter numbers, but issued cautious guidance. Revenue and EPS were both slightly better than expected, but also reflected rapidly decelerating revenue growth.
The bearish aspect of the results was the commentary. CEO George Kurtz said that customers were taking longer to close deals and adding extra layers of required approvals.
Our take: Crowdstrike still has great long-term prospects. Cybercrime continues to increase, and cybersecurity budgets are probably the last to be cut by companies. The problem is that the stock was priced for perfection in a tough market environment.
Prior to today, the stock was still trading on a price-to-sales ratio of 17.6x which implies a lot of growth ahead. With a lot of future growth priced in, a slight change in the growth trajectory can have a substantial effect on the price.
Apple: With little margin of safety, downside risk remains
Apple’s ( Nasdaq: AAPL ) stock price has led the market lower this week and has been under pressure due to protests in China. Protests against the government’s Covid policies are reportedly affecting iPhone production at Foxxcon’s iPhone plant. The most affected model, the iPhone 14 Pro, accounts for a large share of the revenue for Apple, so disruptions aren’t insignificant.
The company is in the process of reducing its exposure to China but still relies on the country. According to Reuters, the percentage of supplier production sites in China has fallen from as high as 47% in 2019 to 36% last year . However, when it comes to the iPhone the number is a lot higher.
Our take: Supply chain disruptions are unlikely to affect demand, so any lost revenue could just be pushed into the next quarter. The problem is that Apple appears to be fairly valued so there isn’t much of a margin of safety.
As per the above graphic below, Apple looks reasonably valued on 3/6 metrics and overvalued on 3/6 metrics. The current P/E ratio is also just about equal to the Fair PE (The fair P/E approximates the expected P/E ratio by accounting for earnings growth forecasts, profit margins, and risk factors.) In other words, by all accounts, Apple is fairly valued at the current price.
We would like to believe that Apple’s growth trajectory will improve in the next few years. But, as it stands the valuation doesn't offer a margin of safety - and not much room for bad news. Further downside isn’t certain, but really wouldn’t be surprising either.
Workday: It seems analysts have been right on this one
Workday’s ( Nasdaq: WDAY ) stock opened 10% higher after the company released third-quarter results. Revenue rose 20.5% from a year ago to $1.6 bln and subscription revenue backlogs point to rising demand. Earnings were also ahead of consensus estimates with non-GAAP EPS of $0.99, though the company is still not profitable on a GAAP basis due to stock-based compensation expenses.
Our take: Unlike CrowdStrike, Workday’s price-to-sales ratio of 6.5x is less demanding. Analysts have also been quite optimistic about Workday’s earnings growth going forward, with GAAP EPS expected to be back in positive territory by the end of 2024.
The chart below shows that prior to these results analysts had optimistic price targets 12 months out, with a relatively tight range of estimates. These results suggest they could be on the right track.
What are the risks and opportunities for CrowdStrike Holdings?
Trading at 17.6% below our estimate of its fair value
Earnings are forecast to grow 47.93% per year
Earnings have grown 0.8% per year over the past 5 years
Shareholders have been diluted in the past year
Significant insider selling over the past 3 months
Simply Wall St analyst Richard Bowman and Simply Wall St have no position in any of the companies mentioned. This article 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.
Richard is an analyst, writer and investor based in Cape Town, South Africa. He has written for several online investment publications and continues to do so. Richard is fascinated by economics, financial markets and behavioral finance. He is also passionate about tools and content that make investing accessible to everyone.