Citi Turns Bearish on CrowdStrike With Sell Rating

Citi initiated coverage of CrowdStrike with a sell rating and a $43 price target. 

This week, Citigroup initiated coverage on CrowdStrike, but the verdict wasn’t pretty. Analyst Walter Pritchard gave the company a sell rating along with a $43 price target. The company’s shares fell more than 10%, though they did rebound slightly in after-hours trading. 

Wall Street has been mostly positive when it comes to CrowdStrike. Out of the 18 analysts currently covering the stock, 11 give it a buy rating. And the company has an average price target of $85.41, representing a 56% upside. 

However, questions persist when it comes to CrowdStrike’s long-term growth prospects. And Pritchard questioned how well the company would be able to compete with other companies in the security industry.

The backstory on CrowdStrike

CrowdStrike is a cybertechnology company that provides endpoint security and cyber-attack response services. The company is credited with uncovering the Russian hacking of the Democratic National Committee servers. 

CrowdStrike went public last June with an initial offering of $34 per share. The stock took off right out of the gate, and at one point, reached a 52-week high of $101.88. After a year of IPO flops, this was greeted with a lot of fanfare from Wall Street. 

However, the company’s shares fell more than 25% in September, after releasing its second-quarter earnings report. The company’s earnings and guidance were pretty good, but investors were hoping to see more, given the company’s high valuation.

But according to Pritchard, the real problem is that the endpoint security market is overcrowded. Pritchard said CrowdStrike is going to have a hard time capturing more than 10% of the market share. 

This puts a cap on the company’s growth and makes it a tenuous investment. Pritchard added that it would be hard for the company to move into other security markets because these are overcrowded as it is. 

What’s next for CrowdStrike?

When it comes to investing in security companies, Pritchard says he prefers companies like Okta or Ping Identity to CrowdStrike. And there are some risks when it comes to investing in CrowdStrike. 

For one thing, the company still isn’t profitable. During its most recent quarter, management reported losses of $51.9 million. This is mostly due to the company’s high sales and marketing costs. And as fears of an oncoming recession continue to grow, the company’s shares could have more room to fall.

But the company is growing quickly, and it has found a niche customer base to work with. If CrowdStrike can continue to grow rapidly, it may eventually be able to justify its high valuation.