Should You Buy CrowdStrike Stock? Its Dip Make CRWD Appealing to Contrarians

Contrarians are now looking very closely at CrowdStrike Holdings (CRWD) stock. The stock is down almost 22% after its software crash last week. However, the outlook for cybersecurity firms' free cash flow is still strong. Put option premiums are now very high, ideal for short plays.

CRWD stock is down to $304.96 on Friday, July 21, from a peak of $390.71 on July 8. This is mainly due to a massive IT worldwide outage on Friday Crowdstrike's update failure caused.

This article will show that even after discounting CrowdStrike's sales forecasts and lowering its FCF margin projection results in an attractive stock price target. CRWD stock could still be worth at least 16% more or $353 per share.

Moreover, CRWD stock put option premiums have risen dramatically. That makes shorting out-of-the-money (OTM) puts in nearby expiry periods very attractive.

Revised Revenue and FCF Forecasts

In my prior Barchart articles on CrowdStrike, including this one on June 9, I pointed out the company is making strong revenue and free cash flow. 

For example, in its latest quarter ending April 30, CrowdStrike made 33% higher revenue YoY during the quarter. Management also increased its guidance to $4.01 billion for revenue for the fiscal year ending Jan. 31, 2025.

Its FCF came in at 35% of revenue, a very high FCF margin. Even if we discount this margin to just 30%, due to higher software expenses, we can expect to see $1.215 billion in FCF this fiscal year.

Moreover, next year analysts forecast sales will rise to $5.04 billion, according to the average of 49 analysts surveyed by Seeking Alpha. To be conservative let's discount that by 10% to just $4.536 billion. Therefore, applying a 30% FCF margin means that CrowdStrike will still generate $1.36 billion in FCF.

So, on a run-rate basis, the FCF forecast for the next 12 months (NTM) is at least $1.2875 billion. This is useful to set a revised price target.

Revised Price Targets

For example, using a 1.5% FCF yield metric allows us to value the stock like other tech stocks. This assumes that the company pays out 100% of its FCF in dividends. The market would likely then give the stock a 1.5% dividend yield.

So, here is how that works. Divide the NTM FCF estimate by 1.5%. That results in a market cap estimate of $85.8 (i.e., $1.2875 b/0.015 = $85.83 billion). Today, after its recent tumble, CRWD stock has a market value of $74.2 billion.

So, that means that even after discounting its revenue forecast by 10% and FCF margins by 15%, CrowdStrike is still worth 15.7% more (i.e., $85.83b/$74.2b-1 = +15.67%). In other words, the price target for CRWD stock is $353 per share (i.e., 1.1567 x $304.96 = $352.75 per share).

Analysts also have higher price targets. For example, Yahoo! Finance says that the average of 44 analysts is $400.50 per share. AnaChart, a new sell-side analyst tracking service, reports that 41 analysts have an average price target of $345.09.

One thing is certain. Put option premiums are now very elevated. That makes them attractive to short sellers to generate extra income, especially for existing shareholders. It also provides a disciplined way to buy in at a cheap price at out-of-the-money (OTM) strike prices.

Shorting OTM Puts

For example, look at the August 16 option expiration period, 27 days from now. It shows that the $290 strike price has an $11.95 put option bid side price.  The $280 strike price, which is over 8% below Friday's price on July 19, is still high at $9.60 on the bid side.

This means that the short sellers of these put options can make very high yields. By selling short the $290 strike price put, an investor can make 4.12% (i.e., $11.95/$290.00) and 3.43% selling the $280 put (i.e., $9.60/$280.00).

CRWD puts expiring Aug 16 - Barchart - As of July 19, 2024

Here is how that works. The investor shorting the $290 strike price has to first secure $29,000 with their brokerage firm. That allows the brokerage to force a purchase of 100 shares at $290, in case the put option buyer exercises their right to buy at $290.00 (i.e. if CRWD stock falls 4.91% from Friday).

Next, the account will immediately receive $1,195 (i.e., $11.95 x 100) in income. That is why the investment yield is 4.12% (i.e., $1,195/$29,000). This also provides the short seller a breakeven price of $290-$11.95, or $278.05. That is 8.8% below today's price.

Moreover, the $280 strike price short provides the short seller an income of $960 after securing $28,000 in cash and/or margin. That also provides a breakeven price of $270.40 (i.e., $280-$9.60), or 11.33% below today's price.

In other words, for existing shareholders, this provides a way to make extra income that helps reduce the unrealized losses they may have lately. For new potential buyers of CRWD stock, this is a way to buy in cheaply, in case the stock keeps falling.

The bottom line is that to contrarians CRWD stock still looks cheap. Even after discounting its ongoing prospects, CRWD stock is still worth 16% more than today's price.

On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.