CrowdStrike's stock lags cybersecurity peers as it is downgraded ahead of earnings

By Wallace Witkowski

Estimates for CrowdStrike need to come down, Morgan Stanley analyst says

CrowdStrike Holdings Inc. shares lagged the mostly positive cybersecurity sector Monday after an analyst, writing of potential risk to estimates, downgraded the stock two days ahead of the company's earnings report.

CrowdStrike shares (CRWD) fell as much as 3.6% Monday to an intraday low of $144.17. They were the worst performing name within the ETFMG Prime Cyber Security exchange-traded fund HACK, which was up 0.4% Monday, buoyed by slight gains across the sector. Only a few others names, like Zscaler Inc. (ZS) and Check Point Software Technologies Ltd. (CHKP), were in negative territory, each down less than 1%. Meanwhile, the S&P 500 SPX was up 0.6%.

In a Monday note, Morgan Stanley analyst Hamza Fodderwala downgraded CrowdStrike's stock to equal weight from overweight and trimmed his price target to $167 from $178 ahead of the company's fiscal second-quarter earnings report, due Wednesday after the market close.

In answer to the question, "Why now?" Fodderwala said he sees downside to consensus 2023 and 2024 estimates, which assume a reacceleration of net new annual recurring revenue, or ARR, a software-as-a-service metric that shows how much revenue the company can expect based on subscriptions.

Analysts surveyed by FactSet estimate, on average, ARR of $3.14 billion for the quarter ending in October and $3.38 billion for the quarter ending in January. For fiscal 2024, analysts forecast ARR of $4.29 billion.

Instead of a reacceleration, another cut to ARR estimates in the second half of 2023 "seems likely," according to Fodderwala.

In June, CrowdStrike shares fell under pressure following a less-than-perfect outlook.

"Our cautious view is based on more recent checks and data points over the last month," Fodderwala said, citing a further slowdown in key industry verticals like tech, telecom and retail, with Target Corp. (TGT) and Home Depot Inc. (HD) among CrowdStrike's largest customers.

Fodderwala also expects headwinds to cloud consumption.

"While enterprises may be several quarters into their cloud optimization efforts, the pace of recovery still remains uncertain," the analyst said. "Public cloud deployments have been a growing contributor to CrowdStrike's top line."

Much of CrowdStrike's new ARR last year was likely from Amazon.com Inc.'s (AMZN) Amazon Web Services, the company's largest go-to-market partner and more than a 10% contributor to ARR.

-Wallace Witkowski

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08-28-23 1411ET

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