Crowdstrike (NASDAQ:CRWD) is an extremely profitable SaaS (Software as a Service) company. Its free cash flow (FCF) and its stellar FCF margins will push CRWD stock much higher. My best estimate is that the stock is worth as much as 39% more than the Sept. 8 close of $265.23.
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This may be hard for some to accept, especially since CRWD stock has already risen some 25% this year, up from nearly $212 at the end of December 2020. In fact, from its trough close on Mar. 29 at $173.85, this stock has risen a little more than 52% today.
But Crowdstrike has made excellent progress in both its first and second quarter this year, particularly with its free cash flow. So, there is good reason to believe CRWD could reach this higher price target. Here’s what you should know.
CRWD Stock: Estimating Free Cash Flow
On Aug. 31, Crowdstrike reported that its annual recurring revenue (ARR) for Q2 2021 rose 70% year-over-year (YOY) to $1.34 billion. This amounted to an ARR increase of $151 million from a record 1,660 new subscription customers for the company’s online cloud security software.
On top of this, though, Crowdstrike also had record revenue of $337.7 million, another 70% increase YOY. Yet, more important than anything, FCF came in at $73.64 million. This represents a FCF margin of 21.8% (i.e., $73.64 million / 337.7 million). Granted, this was lower than the 39% margin the company made during Q1. But we can use the average 30% margin between the two quarters to estimate its FCF for the year.
For example, the company already forecast that its revenue in 2021 will be in the range of $1.391 billion to $1.409 billion. To make it easy, let’s just use $1.4 billion. That implies that, using a 30% margin, Crowdstrike will produce $420 million in FCF margin during 2021.
However, I suspect that this number is already probably discounted in Crowdstrike’s valuation. So, we will likely have to start using an FCF estimate for 2022 to properly value CRWD stock.
Valuing Crowdstrike Using FCF Yield
One of the best ways to value a stock is to use an estimate of its FCF yield: the higher the valuation, the lower the FCF yield ratio. For example, using the $420 million FCF estimate and dividing it by CRWD’s recent market capitalization of $63.49 billion results in a ratio of 0.662%.
To be simple, we can use an FCF yield of 0.66% to estimate its value based on 2022 FCF estimates. Analysts surveyed by Seeking Alpha forecast that 2022 revenue will grow to $1.94 billion. Using a 30% FCF margin, this results in an estimate of $582 million for next year.
Therefore, dividing $582 million by 0.66% (the FCF yield metric from 2021) we get a projected market cap of $88 billion. This represents a potential gain of 38.6% over the recent market cap of $63.49 billion.
In other words, CRWD stock could be worth about $367.60 per share (i.e., 38.6% over the recent price of $265.23). And keep in mind, this is based on the average FCF margins between Q1 and Q2. If the remainder of 2021 proves to have a higher FCF margin, this name could be worth even more.
What to Do with CRWD Stock
Analysts also expect CRWD stock to rise over the next year, although their target prices are lower than mine. For example, Seeking Alpha’s survey of 26 Wall Street analysts shows their average price target at $307.46, or about 16% over the Sept. 8 close price. Additionally, the survey of 20 analysts on Tipranks has an average price target of $314.90, or nearly 19% higher than today. Finally, Yahoo! Finance shows an average target of $310.62.
My projection of a much higher target at around $367 could partly be due to my focus on 2022 revenue. However, one of the benefits of investing in a SaaS stock like this is that revenue, growth and FCF can be fairly consistent and predictable. This assumes its growth trend continues as analysts project next year. That is why I focused on 2022 estimates.
Investors might want to begin taking a toe-hold position in CRWD stock, despite its strong move up already. That said, given the predictable and recurring nature of its revenue and FCF, it seems that this one could be a good bet.
On the date of publication, Mark R. Hake did not hold any positions (either directly or indirectly) in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.