Sundry Photography/iStock Editorial via Getty Images
Morgan Stanley downgraded CrowdStrike (NASDAQ:CRWD) to Equal-weight from Overweight ahead of the company’s Q2 results, as the firm sees a downside to consensus CY23/24 estimates.
The firm also cut the price target on CRWD to $167 from $178. CrowdStrike is scheduled to report Q2 results after the bell on Wednesday.
Morgan Stanley’s analysts said they are cautious ahead of Q2 earnings this week as consensus estimates for H2/CY24 rebound appear high in light of a more difficult demand environment.
The analysts added that another reduction to consensus CY23/24 ARR estimates seems likely, while risk-reward seems more balanced now after +45% year-to-date gain of the stock.
The firm noted that its cautious view is based on recent checks and data points over the past month, which include — Further slowdown in key industry verticals, including Tech/Telco and Retail (such as Target, Home Depot among largest CRWD customers).
The analysts estimate that these verticals together represent >20% of total company ARR and continue to spend more cautiously, likely leading to more phased deployments and smaller deal sizes. Broadly, the analysts think that the slowdown in core endpoint security is likely to last through CY24, with a recovery in CY25.
The firm also sees Cloud consumption headwinds. The companies may be several quarters into their cloud optimization efforts, however, the speed of recovery still remains uncertain. The Public Cloud deployments have been a growing contributor to CrowdStrike topline, representing >14% of net new ARR last year and increasing about 3X faster than the company overall, according to the firm.
The analysts think that much of this is tied to Amazon Web Services, or AWS, which is CrowdStrike’s largest go-to market partner (10%+ of total ARR) and has seen a much larger topline deceleration compared to cloud peers.
Slower growth in cloud workloads likely puts some downward pressure on CrowdStrike’s net retention rate, the firm added.
The analysts noted that cautious view is also due to limited upside to FCF margin as customers increasingly want annual upfront payments, which is reflected in management guidance to a degree.
In addition, as management aims to lay the groundwork for a $10B ARR longer term, the analysts expect the required investment in new product categories (security analytics and observability among others), both organic and M&A, is likely to lead to modest operating leverage over the next few years.
The analysts said that while they still prefer CRWD in the long term and valuation is not demanding at 29X EV/CY24 FCF, they believe the risk-reward is more balanced here due to negative revisions risk and a likely gradual demand recovery.
CrowdStrike has a Hold rating at Seeking Alpha’s Quant Rating system, which consistently beats the market. Seeking Alpha authors’ average rating is more positive with a Buy, while the average Wall Street analysts’ rating is Strong Buy.
CRWD -2.25% to $146.21 premarket Aug. 28
