CrowdStrike's (NASDAQ:CRWD) Valuation Seems Reasonable Given Current Forecasts

Richard Bowman
November 16, 2021
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Yesterday, shares of CrowdStrike Holdings, Inc . ( NASDAQ:CRWD ) fell 10.6% after Morgan Stanley initiated coverage with an underweight rating. The broker cited increasing competition in the ‘next gen’ cybersecurity space. In September Goldman Sachs also downgraded the stock, and more recently BTIG Research changed its call from Buy to Neutral.

The average earnings forecasts for CrowdStrike have remained flat over the past 6 months, but if this is the beginning of a trend, we could see those forecasts begin to fall. We decided to have a look at Crowdstrike’s intrinsic value based on expected future cash flows as they stand now. 

How much is CrowdStrike worth?

We are calculating the intrinsic value by taking the expected future cash flows and discounting them to their present value. This will be done using the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.

We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

See our latest analysis for CrowdStrike Holdings

Step by step through the calculation

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. To begin with, we have to get estimates of the next ten years of cash flows. 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.

Generally we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) estimate

2022 2023 2024 2025 2026 2027 2028 2029 2030 2031
Levered FCF ($, Millions) US$369.7m US$546.0m US$747.9m US$1.33b US$2.09b US$2.70b US$3.26b US$3.76b US$4.18b US$4.54b
Growth Rate Estimate Source Analyst x16 Analyst x16 Analyst x13 Analyst x2 Analyst x2 Est @ 29.07% Est @ 20.94% Est @ 15.24% Est @ 11.26% Est @ 8.47%
Present Value ($, Millions) Discounted @ 6.3% US$348 US$483 US$623 US$1.0k US$1.5k US$1.9k US$2.1k US$2.3k US$2.4k US$2.5k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$15b

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.The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.0%. We discount the terminal cash flows to today's value at a cost of equity of 6.3%.

Terminal Value (TV) = FCF 2031 × (1 + g) ÷ (r – g) = US$4.5b× (1 + 2.0%) ÷ (6.3%– 2.0%) = US$106b

Present Value of Terminal Value (PVTV) = TV / (1 + r) 10 = US$106b÷ ( 1 + 6.3%) 10 = US$58b

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$73b.In the final step we divide the equity value by the number of shares outstanding.Relative to the current share price of US$254, the company appearsa touch undervaluedat a 20% discount to where the stock price trades currently.The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.

NasdaqGS:CRWD Discounted Cash Flow November 16th 2021

The assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own assumptions. 

Key Takeaways:

The good news for shareholders is that CrowdStrike appears to still be trading at a small discount to its estimated value. If average forecasts do decline in the coming months, the fair value estimate will fall, and you can keep track of that by referring to our valuation analysis which is updated daily.

We have only looked at one aspect of CrowdStrike here. For a more complete picture, we've identified three more issues that you may want to be aware of:

  1. Risks: You should be aware of the 2 warning signs for CrowdStrike Holdings we've uncovered before considering an investment in the company.

  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. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NASDAQGS every day. If you want to find the calculation for other stocks just search here .

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.

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