Why CrowdStrike's stock just got downgraded after a monster rally

By Emily Bary

CrowdStrike's enterprise-value-to-sales ratio is the highest among large software stocks that Piper Sandler tracks

CrowdStrike Holdings Inc. shares rose 50% in the first half of 2024 to rank as one of the best performers in the S&P 500 over that span.

But now Piper Sandler analyst Rob Owens is recommending that investors press the pause button, as he downgraded the cybersecurity stock to neutral from overweight in a late Monday report. He left his $400 price target intact.

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"We are optimistic about the company longer term as well as the opportunity, just not the stock over our 12-month investment horizon," Owens wrote of CrowdStrike (CRWD).

He noted that this downgrade is a "valuation call," since his industry checks didn't reveal "any disruption in the underlying momentum or competitive positioning that [CrowdStrike] currently enjoys."

Read: CrowdStrike proves it's a software standout as stock soars after earnings

Still, he flagged how big CrowdStrike has become lately. The company is doing $3.6 billion in annual recurring revenue and could see its top line swell above $4 billion in fiscal 2025. That suggests "meaningful upside will likely become more difficult as the law of large numbers should begin to weigh on overall growth rates for the security leader - which could cause returns to lag other names in the space," in Owens' view.

He also mentioned that CrowdStrike's stock has the highest multiple of enterprise value to sales (18.9x) of the software names he tracks that have market capitalizations above $75 billion. CrowdStrike's 57x free-cash-flow multiple is also "among the highest" in the grouping.

Shares of CrowdStrike are down 2% in premarket trading Tuesday.

By Owens' assessment, the company "undeniably has a multitude of opportunities ahead with cloud, identity, logging/[security information and event management], and IT as its best of breed, cloud-native architecture truly differentiates the platform aspect of the story relative to competitors." And CrowdStrike, with "some of the best metrics in software," also executes well.

"However, we feel that much of this is reflected in the valuation at current levels," Owens said.

-Emily Bary

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07-02-24 0759ET

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