Is the Downturn Here to Stay for CrowdStrike?
CrowdStrike (CRWD -2.82%) has faced a tumultuous couple of weeks.
The prominent endpoint-cybersecurity firm experienced a historic crash and what some are calling one of the most significant IT failures ever.
A faulty software update from CrowdStrike led to Microsoft Windows systems crashing worldwide, causing significant disruptions across various global industries, including airlines, broadcasting, and retail.
Consequently, CrowdStrike’s stock plummeted, dropping 11% on July 19 and another 13.5% on July 22 as the software issues persisted through the weekend. By the week’s end, the stock had lost an additional 3%, marking a decline of over 25% since the outage began.
The steep sell-off appears justified given the potential damage to the company’s reputation and the challenges it may face in retaining and acquiring customers. However, astute investors recognize that such sell-offs can present buying opportunities, as the stock could rebound once the incident fades from memory and CrowdStrike returns to normal operations.
Should You Invest in CrowdStrike Now or Wait for Clarity?
To determine whether to invest in CrowdStrike now, let’s examine the company’s current situation following the outage.
Recovery Path
There was a silver lining for CrowdStrike investors last week. CEO George Kurtz announced on Friday that nearly all (about 97%) connected devices were back online.
CrowdStrike will need to undertake significant damage control to assure customers of its reliability and prevent future errors similar to this software update glitch. However, there are reasons to believe the company can recover from this mistake over time. Increased awareness of CrowdStrike and global IT infrastructure might spur more hiring and investment in cybersecurity and IT infrastructure. Companies may also opt for multiple cybersecurity services to create redundancies and better protect themselves.
Market Resilience
Spending on cybersecurity is not expected to diminish and will likely continue to grow. Customers can choose between CrowdStrike and competitors like Palo Alto Networks, SentinelOne, and even Microsoft’s own endpoint-cybersecurity software.
Other companies have also faced significant challenges, including outages and negative media coverage, and have rebounded. For example, the 2017 Equifax data breach exposed the personal information of 147 million people, causing the stock to plunge, but it recovered nearly all those losses within six months. Similarly, cloud-identity specialist Okta experienced multiple breaches since 2022 but has seen its stock climb since then.
While the CrowdStrike incident is significant, and its reputation has taken a hit, with some customers possibly switching to rivals, the company can recover. It may need to invest more in controls to prevent future issues and reassure customers.
Investment Considerations
While CrowdStrike deserves the setback for its faulty software update, a 25% drop seems excessive. The stock remains expensive, trading at a price-to-sales ratio of 19, but it is growing quickly, with a 33% increase in revenue in its most recent quarter and strong profit margins after adjusting for share-based compensation.
Given its high valuation, CrowdStrike could fall further. However, the sell-off triggered by a temporary issue presents a potential buying opportunity. A prudent approach would be to open a small position while keeping some cash in reserve to buy more if the stock dips further.
The long-term outlook for CrowdStrike remains positive despite the recent setback. The stock might start to rebound in the coming weeks as investors anticipate its upcoming earnings report.
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