The Key Number That Explains Why CrowdStrike May Power Higher

Volatile movement around earnings is playing to the advantage of institutions 

In what is becoming a pattern this earnings season, shares of CrowdStrike (NASDAQ:CRWD) fell the day after the cybersecurity company posted a better-than-expected earnings report. CrowdStrike reported earnings of 31 cents per share on revenue of $487.83 million. Both of those numbers were higher on a sequential and year-over-year (YOY) basis. 

However, the stock fell approximately 8% the day after the earnings announcement. And even though it’s pared that loss, CRWD stock is still trading about 4% below its pre-earnings high as of mid-day trading on June 6.  

Of course, it’s always important to figure out the why behind price movement. Or at least make a strong attempt. And in this article, I’ll put out one explanation that makes sense to me. If it’s correct, this may be an opportunity to strategically accumulate CRWD stock at an attractive price.  

A Pattern is Emerging  

CrowdStrike is a toddler among publicly traded companies. It went public in 2019. And investors have turned on newly public companies. But if this is the case with CrowdStrike then they’re missing the plot. Because unlike many companies that first go public, CrowdStrike brought growing earnings with it. And the company was profitable within a year.  

Since then, in nine out of 12 quarters that the company has reported earnings. the amount of institutional buying has outpaced the amount of institutional selling. And in one of the three quarters when that momentum reversed, the numbers were essentially a wash. Today, institutional ownership of CRWD stock is over 63%. 

The reason why the number of institutional investors matters is when you look at what tends to happen to CRWD stock around earnings. There’s a run-up in the stock price as institutional buyers anticipate a strong earnings report. Then after the company reports, the stock dips right after the retail investors rush in.  

There’s nothing unusual about this. It’s a typical course of action for institutional investors. And all of us have made the mistake of chasing a stock as its rallying ahead of earnings (I know I have). But if you’re a long-term investor this shouldn’t concern you. Yes, CRWD stock is down 18% in the last 12 months. That’s a little worse than the NASDAQ Composite Index which is down 12%. But the takeaway is the same. It’s been a rough 12 months for tech stocks.  

What Do the Analysts Say? 

The consensus price target of analysts tracked by MarketBeat is $248.57. That’s a 47% increase from the current price of CRWD stock. And on June 6, 2022 CrowdStrike received an upgrade from Morgan Stanley (NYSE:MS) who raised the stock to Overweight from Equal Weight. The firm gave CrowdStrike a price target of $215.  

Pressure Will Remain on CRWD Stock 

With the Federal Reserve removing liquidity from the market, technology investors can no longer afford to ignore true fundamentals. The sector is likely to remain under pressure as institutional and retail investors alike try to determine what the real value of these stocks should be.  

However, this is also a time when quality matters. And CrowdStrike is still one of the leading players in the cybersecurity sector. The company has a cloud-first business that moves existing security protocols into the cloud. That’s a model that is being embraced by 63 out of the Fortune 100 companies and 14 of the nation’s top 20 banks.  

And the company is translating the revenue it earns into strong free cash flow which grew over 34% in the quarter. That makes it eight out of the last ten quarters in which the company reported FCF margin of over 30%.  

With all that said, there’s an easy case to make that CRWD stock will be higher several years from now then it is today. But it’s likely to be a rocky road. Investors should build their positions accordingly.