Yesterday’s actions CrowdStrike Holdings, Inc . (NASDAQ: CRWD) fell 10.6% after Morgan Stanley launched a hedge with an underweight stance. The broker spoke of growing competition in the ‘next generation’ cybersecurity space. In September, Goldman Sachs also downgraded the stock’s rating and, more recently, BTIG Research changed its call from To buy To Neutral.
The average profit forecast for CrowdStrike has remained stable over the past 6 months, but if this is the start of a trend, we could see those forecasts start to decline. We have decided to examine the intrinsic value of Crowdstrike on the basis of expected future cash flows as they currently stand.
How much is CrowdStrike worth?
We calculate intrinsic value by taking expected future cash flows and discounting them to their present value. This will be done using the Discounted Cash Flow (DCF) model. There really isn’t much to do, although it might seem quite complex.
We generally believe that the value of a business is the present value of all the cash it will generate in the future. However, a DCF is only one evaluation measure among many, and it is not without its flaws. For those who are passionate about equity analysis, the Simply Wall St analysis template here may be something of interest to you.
See our latest review for CrowdStrike Holdings
Step by step in the calculation
We’re going to use a two-stage DCF model, which, as the name suggests, takes into account two growth stages. The first stage is usually a period of higher growth which stabilizes towards the terminal value, captured in the second period of “steady growth”. To begin with, we need to get cash flow estimates for the next ten years. Where possible, we use analyst estimates, but when these are not available, we extrapolate the previous free cash flow (FCF) from the last estimate or stated value. We assume that companies with decreasing free cash flow will slow their rate of contraction, and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect the fact that growth tends to slow down more in the early years than in subsequent years.
In general, we assume that a dollar today is worth more 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
|Levered FCF (millions of $)||US $ 369.7 million||US $ 546.0 million||US $ 747.9 million||US $ 1.33 billion||US $ 2.09 billion||US $ 2.70b||US $ 3.26 billion||3.76 billion US dollars||US $ 4.18 billion||US $ 4.54 billion|
|Source of estimated growth rate||Analyst x16||Analyst x16||Analyst x13||Analyst x2||Analyst x2||East @ 29.07%||Est @ 20.94%||Is 15.24%||Est @ 11.26%||Est @ 8.47%|
|Present value (in millions of dollars) discounted at 6.3%||US $ 348||483 USD||US $ 623||US $ 1.0k||US $ 1.5k||US $ 1.9k||US $ 2.1k||US $ 2.3k||$ 2.4,000||US $ 2.5,000|
(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flows (PVCF) = US $ 15 billion
After calculating the present value of future cash flows over the initial 10 year period, we need to calculate the terminal value, which takes into account all future cash flows beyond the first step. The Gordon growth formula is used to calculate the 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 their present 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) ten = US $ 106b ÷ (1 + 6.3%) ten = 58 billion US dollars
The total value, or equity value, is then the sum of the present value of future cash flows, which in this case is $ 73 billion. In the last step, we divide the equity value by the number of shares outstanding. Current share price of $ 254, the company appears to be slightly undervalued at a 20% discount from the current share price. The assumptions in any calculation have a big impact on the valuation, so it’s best to take this as a rough estimate, not accurate down to the last penny.
The above calculation is very dependent on two assumptions. One is the discount rate and the other is cash flow. Part of investing is coming up with your own assessment of a company’s future performance, so try the math yourself and check your own assumptions.
Key points to remember:
The good news for shareholders is that CrowdStrike always appears to be trading at a small discount to its estimated value. If the average forecast goes down over the next few months, the fair value estimate will go down, and you can keep track of this by referring to our valuation analysis which is updated daily.
We’ve only looked at one aspect of CrowdStrike here. For a more complete picture, we’ve identified three other issues you might want to know about:
Risks: You should be aware of the 2 warning signs of CrowdStrike Holdings that we have discovered before considering an investment in the business.
Management: Have insiders increased their stocks to take advantage of market sentiment about CRWD’s future prospects? Check out our management and board analysis with information on CEO compensation and governance factors.
Other Strong 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 trading fundamentals to see if there are other companies you may not have considered!
PS. The Simply Wall St app performs a daily discounted cash flow assessment for each NASDAQGS share. If you want to find the calculation for other actions, do a search here.
Richard Bowman, analyst at Simply Wall St, and Simply Wall St have no positions in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents.
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