The recent outage may or may not present an opportunity, but investors should approach this question carefully.
CrowdStrike Holdings (CRWD 0.79%) committed a major unforced error on July 19 when one of its software updates crashed more than 8.5 million users of Microsoft Windows. The cybersecurity stock lost over 20% of its value over two trading sessions as the failed update hampered operations across many of the world’s largest businesses.
A crucial question for investors is how it affects the stock in the long term. In this article, three Motley Fool contributors share their opinions on the state of CrowdStrike and where investors should go from here.
Make no mistake: CrowdStrike is in survival mode
Jake Lerch: Let’s get one thing clear: Mistakes happen. And, oh boy, how CrowdStrike has learned that lesson.
Some have labeled the series of computer crashes as the “world’s greatest IT outage” after banks, hospitals, and airports all went dark due to a faulty software update from CrowdStrike.
The real questions for investors are: How much reputational damage has the company suffered, and should the bull thesis for its stock be re-examined.
Let’s start with the reputational damage. It’s extensive and potentially long-lasting.
First, not all of the problems caused by the outage had been fixed as of this writing — CrowdStrike says as of July 26, 97% of affected users were back online. The outage caused flight delays and cancellations, postponed crucial medical procedures, delayed cancer treatments, and knocked out 911 service in some areas.
In short, a software update from CrowdStrike brought on a nightmare scenario that many experts thought would come from a catastrophic hacking attack. That’s a major problem because its business model is built around the ability to detect and prevent such catastrophes, not create them.
Once all the current problems are fixed, management will have new challenges. There will undoubtedly be several investigations and lawsuits that spring up. Several members of Congress have already called for CEO George Kurtz to testify. None of this will help CrowdStrike focus on executing its business model or delivering returns for shareholders.
Accordingly, investors must reassess the company’s ability to deliver revenue growth, which is the key to the bull thesis. It will likely dip as customers drop CrowdStrike altogether or scale back their subscription spending. New lawsuits would force the company to use any profits and cash flow to pay legal fees and settlements, not deliver shareholder returns or grow the business.
In summary, investors would be wise to remain highly cautious on CrowdStrike, at least for several quarters. The company has found itself in an enormous mess — there’s no reason for investors to ensnarl themselves in it as well.
Investors should take this issue more seriously than CrowdStrike seemingly has
Justin Pope: Mighty CrowdStrike has been a stock market standout and favorite among growth investors since the company went public five years ago. But the IT outage poses several problems for investors, and it’s important to appreciate their potential impact on the stock.
Fortunately for CrowdStrike, a faulty update caused the IT outage rather than some security breach that would further taint the company’s reputation as a best-in-class cybersecurity vendor.
The damage the outage has caused is staggering. Early insurance estimates peg the direct financial losses to Fortune 500 companies alone at more than $5 billion. Those are tangible losses and don’t include anything incalculable, like reputational damage.
For example, thousands of Delta customers were stranded at the airline’s hubs for days without a means to get home. Do you think those people will be eager to book with Delta again soon?
Then, reports surfaced that CrowdStrike supposedly offered a $10 gift card to customers as compensation for any inconvenience the outage caused. If true, it’s a laughably poor public relations misstep, considering this is arguably the most significant IT outage in history.
I’m not saying CrowdStrike is doomed, but it’s still far too early to know how this will hurt the business. The cybersecurity sector is highly competitive, and rest assured, other vendors will spend the next few months poaching the company’s clients. It might take a quarter or two to see what the damage is.
Meanwhile, the stock is still more expensive than its peers despite its 30% drop:
CRWD EV-to-revenue data by YCharts; EV = enterprise value.
I think the company can eventually overcome this, but the stock is still far too expensive. We are just days beyond the outage, and nobody knows the full extent of the damage yet.
Will CrowdStrike lose clients? How many? Will customers demand compensation or discounts? What about lawsuits? It’s better to be safe than sorry and stay on the sidelines until the dust settles.
How you manage CrowdStrike stock could be more crucial than if you buy it
Will Healy: CrowdStrike investors now face a difficult challenge. The service interruption disrupted healthcare, airlines, banking, and other industries, costing untold sums. You have to assume lawsuits are coming, and it is unclear how those costs will hit CrowdStrike. Hence, investors were right to dump its shares.
However, as painful as the idea of buying it sounds now, history favors buying high-quality stocks when there is “blood in the streets,” to borrow a phrase from Baron Nathan Rothschild, an 18th-century British nobleman. Indeed, the current outage probably qualifies as such an event.
And it is to CrowdStrike’s credit that it has admitted fault and moved quickly to fix the problem, a first step in addressing the considerable reputational damage that could result.
Also, the uncertainty will likely subside eventually, which should bode well for the company, assuming the focus gradually returns to the fundamentals. Fortune Business Insights estimates a compound annual growth rate (CAGR) of 14% for the cybersecurity industry through 2032.
Moreover, the company forecast revenue in a range of $3.98 billion to $4.01 billion for fiscal 2025 (ending Jan. 31, 2025). That amounts to 30% yearly revenue growth at the midpoint, and even if the outage forces a downward revision, its revenue growth should exceed the estimated industry CAGR.
Nonetheless, valuations do not necessarily indicate investors should buy right now. Shares currently sell at a price-to-sales (P/S) ratio of 19. Though that’s below the 29 P/S just three weeks prior, its valuation exceeds those of its most direct competitors. And with its current troubles, most investors are probably reluctant to pay a premium for the stock.
Still, investors who buy now should consider dollar-cost averaging. Adding CrowdStrike in small allotments over an extended period will minimize losses if the stock continues to fall. Conversely, if a rapid recovery somehow occurs, shareholders will hold at least some shares that rise in value, increasing the likelihood of profiting from this uncertainty.
