Morgan Stanley downgrades CrowdStrike ahead of earnings

Published Mon, Aug 28 20237:42 AM EDTUpdated Mon, Aug 28 202312:39 PM EDT

Morgan Stanley is worried about CrowdStrike ahead of the company's latest earnings report this week. Analyst Hamza Fodderwala downgraded the cybersecurity company to equal weight from overweight and lowered his price target to $167 from $178. Fodderwala's new target suggests the stock could still climb more than 11.65% in the next year. "We are cautious [on] CRWD ahead of FQ2 earnings this week as consensus estimates for 2H/CY24 rebound appear high in light of a more difficult demand environment," Fodderwala said in a Monday note. "Another cut to consensus CY23/24 annual recurring revenue estimates seems likely, while risk-reward seems more balanced now." CrowdStrike, which is set to report earnings Wednesday after the market closes, has gained more than 23% in the past six months. The stock lost 2.6% in premarket trading Monday. CRWD 6M mountain CrowdStrike in past 6 months Fodderwala cited three factors for the bank's cautious view: Further slowdown in the company's key industry targets, including tech and retail: Companies such as Target and Home Depot, which are among CrowdStrike's largest customers, are spending more cautiously, likely resulting in smaller deal sizes. Headwinds in cloud consumption: The pace of recovery in companies' cloud optimization efforts remains uncertain. Amazon Web Services is CrowdStrike's largest go-to market partner and accounts for 10% of its annual recurring revenue. Limited upside in free cash flow: Customers are increasingly desiring annual upfront payments. With management planning toward $10 billion annual recurring revenue longer term, the analyst expects necessary investment in new product categories, such as security analytics, that should result in modest operating leverage over the next few years. Fodderwala said the firm continues to see long-term opportunity in CrowdStrike and is not structurally "bearish" on the company. Upside on the stock is based on factors such as the company's growth in its emerging products, which Fodderwala said should partially offset cloud headwinds, as well as its improving competitive positioning. — CNBC's Michael Bloom contributed reporting.