CrowdStrike (NASDAQ:CRWD) still looks like it is worth significantly more. This is based on its powerful cloud security software products that generate huge amounts of free cash flow. My view is that CRWD stock is still worth at least $367.60, as I wrote in my last article on Sept. 9. In fact, it might even be worth more, as I will explain below.
Since I wrote about the stock on Sept. 9, when it closed at $265.16, it has risen to $280.10 as of Oct. 25. That is a gain of 5.6% in around a month and a half for CRWD stock. But it still has 31.2% in potential upside based on my estimate.
CRWD stock hit a new high at over $297 on Oct. 26. I suspect that over the next 12 months the stock will rally even higher if CrowdStrike keeps producing huge amounts of FCF.
Estimating FCF at CrowdStrike
As I mentioned last time, CrowdStrike reported strong earnings on Aug. 31 for its second quarter ending July 31. The cloud security software firm added 1,660 net new subscribers and revenue rose 70% over the prior-year quarter to $337.7 million.
But, as I pointed out in my last article, FCF came in at $73.64 million for the quarter. This works out to an FCF margin of 21.8% of its Q2 revenue.
As I pointed out before, this was lower than the 39% FCF margin CrowdStrike made during Q1. But over the past two quarters, it has averaged 30% FCF on its six months sales.
Here is why that is important. Applying a 30% margin on its 2022 forecast sales of $1.94 billion (as forecast by analysts surveyed by Seeking Alpha) results in an FCF estimate of $582 million.
Using FCF Yield to Value CRWD Stock
In my last article, I used a 0.66% FCF yield to value the company. For example, dividing $582 million by 0.66% results in a target market cap of $88.18 billion ($582 million / 0.66% = $88.18 billion).
But now I believe that as revenue rises and its FCF grows the stock will end up having a more beneficial FCF yield metric. For example, it is not unreasonable that, given the huge margins it posted in Q1, that CrowdStrike could post a 33% FCF margin in 2022. If that happens, the market will likely give the stock a 0.6% FCF yield.
Here is how that would look. First, multiply the 2022 forecast revenue by 33%. That results in an FCF estimate of $640 million.
Next, divide that number by 0.60%, to derive a target market cap of $106.7 billion. That represents a 65% higher market capitalization than its present $64.67 billion market cap.
This results in a new target price of $462.17 per share. That is much higher than my prior price target of $367.60.
What to Do With CRWD Stock
Analysts have lower price targets than mine. For example, Seeking Alpha’s survey of 27 Wall Street analysts shows their average price target at $307.44, or about 9.8% over the Oct. 25 price.
In addition, a survey of 19 analysts by TipRanks has an average price target of $315.68, or nearly 13% higher than today. Meanwhile, the average of 27 analysts surveyed by Refinitiv and published on Yahoo Finance shows an average price target of $310.48.
These projections are all higher than today’s price, although not as high as my original $367.20 target or my new $462.17 price targets.
Nevertheless, analysts generally see what I see, and that is a fast-growing SaaS (software-as-a-service) company that is producing larger amounts of free cash flow. If the upcoming Q3 results for the quarter ending Oct. 31 show a similar high FCF margin, expect to see CRWD stock rise significantly.
Moreover, if that happens, you will likely also see Wall Street analysts increase their target prices as well. That is why I am not afraid that my price target is significantly higher than other analysts at this time.
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.