Key Morningstar metrics for CrowdStrike Holdings

  • Fair Value Estimate: $300.00
  • Morningstar Rating: 3 stars
  • Morningstar Economic Moat Rating: Narrow
  • Morningstar Uncertainty Rating: High

Investor confidence in CrowdStrike Holdings (NAS: CRWD) has plummeted following the global IT outage caused by a faulty content update. The firm’s shares are down more than 30% since the incident in the early hours of July 19. After doing a more extensive review, following our initial reaction Friday morning, we are maintaining our $300 fair value estimate and narrow economic moat rating for the company. We continue to view CrowdStrike as a high-quality security vendor with an exceptional track record of profitable growth that we see continuing.

While we viewed CrowdStrike’s shares as overvalued before the chaos, we are not as pessimistic as the market about the outage’s impact on the firm’s business. We now view shares as marginally undervalued, but still trading in 3-star territory. CrowdStrike’s robust platform, strong relationships with end customers and value-added resellers, and its expansive platform that stands to benefit from vendor consolidation within security, all underscore our confidence in the firm’s long-term potential.

While we maintain our confidence in the firm’s long-term opportunity, we think there will be short-term costs. We believe CrowdStrike’s management and sales teams will have to work extensively at assuaging customer concerns. We foresee the company needing to offer discounts and credits to existing customers to entice them to stay. While this creates near-term headwinds, our base case doesn’t include a doomsday scenario with substantial customer churn and materially lower medium-to-long-term top-line expansion.

Business strategy and outlook

We view CrowdStrike as a leader in endpoint security, a prominent part of the cybersecurity stack that protects an enterprise’s endpoints from nefarious activity. As enterprises undergo digital transformations and cloud migrations, we foresee endpoint security further gaining wallet share of an enterprise’s security spend. Within this growing market, CrowdStrike has emerged as a leader and we think the stickiness of its platform, Falcon, is clear in the firm’s impressive gross and net retention metrics. Beyond endpoint, CrowdStrike has been enhancing its security portfolio by adding cloud security, identity security, and security operations offerings to its Falcon platform. These newer initiatives have garnered strong customer traction, allowing CrowdStrike an opportunity to embed itself further into its customer’s security ecosystems.

In an evolving landscape that continues to increase in threat complexity and intensity, we see IT security teams looking for platforms that offer more holistic security coverage versus point solutions that can inadvertently create data silos. This shift toward consolidation is an opportunity for cybersecurity vendors such as CrowdStrike that provide multiple security products across different security verticals. By providing a broad range of cybersecurity solutions under the same platform, CrowdStrike can also alleviate its clients’ toolset management burden.

We are encouraged by CrowdStrike’s ability to attract customers and expand its customer base. After onboarding a customer, we typically see a consistent movement along the upselling schedule with customers adopting more CrowdStrike security solutions. We see this "land-and-expand” strategy employed by CrowdStrike as potent since, by moving customers along the upselling schedule, the firm is able to entrench itself further within a client’s IT ecosystem and increasing its switching costs over time.

Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company's future cash flows, resulting from our analysts' independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.

Uncertainty Rating: Morningstar’s Uncertainty Rating is designed to capture the range of potential outcomes for a company. An investor can think of this as the underlying risk of the business. For higher risk businesses with wider ranges of potential outcomes an investor should consider a larger margin of safety or difference between the estimate of what a share is worth and how much an investor pays. This rating is used to assign the margin of safety required before investing, which in turn explicitly drives our stock star rating system. The Uncertainty Rating is aimed at identifying the confidence we should have in assigning a fair value estimate for a stock. Read more about business risk and margin of safety here.

Get Morningstar insights in your inbox