Last month, Crowd Strike (NASDAQ: CRWD) Microsoft Corp. has faced one of the biggest nightmares for tech companies: The cybersecurity giant released a flawed software update that shut down operations for customers around the world, in what experts are calling the largest IT outage in history.
Companies faced blue screens of errors and couldn’t access data needed to maintain everything from flight schedules to surgery schedules. Businesses ground to a halt.
Unsurprisingly, CrowdStrike’s stock has been on the decline, and as of today, it’s down more than 30% since the outage on July 19. The company acted quickly, fixing the software issue in just an hour, but reestablishing customer systems has been a longer process. Today, CrowdStrike says that 99% of its Windows sensors are online, meaning most systems are up and running.
This event was not due to a security breach, which is great news for CrowdStrike because the company’s job is to protect customers from cyberattacks. The outage did not call into question CrowdStrike’s ability to do its job. However, investors are concerned about the impact on the company and have been hesitant to buy this stock when it’s down — even though it’s been a high-growth leader for some time.
What should you do now? Here are 2 reasons to buy CrowdStrike and 1 reason to sell.
Reason for purchase: The financial impact of the outage may be limited.
We still don’t know how financially the outage will impact CrowdStrike. Ultimately, the company could lose customers and face legal action. For example, Delta Air Lines Delta says the incident caused more than 5,000 flights to be cancelled and cost the company $500 million in losses, and the company now plans to file a lawsuit seeking damages.
At the same time, CrowdStrike’s terms and conditions are limited to “fees paid” by customers. Of course, some customers may have signed a contract under different terms — or legal teams may have taken a path that would result in additional compensation for their customers. But from what we know now, CrowdStrike may not be taking on a huge financial burden.
It is also important to remember that insurance provided by CrowdStrike or its customers may cover certain losses.
All of this means that CrowdStrike will face a financial impact from the outage — and we’ll likely see this in the coming quarters — but it’s manageable.
Reason to buy: Strong market position means CrowdStrike could weather the storm
CrowdStrike’s AI-powered, all-cloud security platform has helped the company become a market giant, serving more than 60 Fortune 100 companies as of Q1 FY25. According to an IDC report, the company held the highest market share for modern endpoint security at more than 17% as of June 2022.
Customers have flocked to the company’s Falcon platform, which comes in 28 security modules that can be used together or separately. In the quarter, deals with eight or more modules increased by 95%, and module adoption rates reached 65% for deals with five or more modules.
All of this has led to CrowdStrike’s earnings growth over time and in the last quarter. Annual recurring revenue (ARR) in the three-month period rose 33% to more than $3.6 billion, and the company generated record operating cash flow and free cash flowWhich amounted to $383 million and $322 million, respectively.
Even if some CrowdStrike customers decide not to renew contracts, the company’s market dominance and financial performance suggest it has the ability to weather the storm.
Reason for selling: Pressure may affect the stock in the short term
While I believe CrowdStrike’s long-term success story remains strong, the coming months, and even the next year or so, may not be easy. The company will likely have to deal with lawsuits and negotiate compensation with customers—and it has the huge task of regaining the trust of both customers and investors.
At the same time, the stock isn’t necessarily cheap, even after recent declines. It’s trading at 58x forward. Future earnings estimates — Reasonable price if the outage doesn’t happen, but a level that some may consider expensive given the near-term uncertainty. Those investors may wait for more clarity on how the outage will impact CrowdStrike’s earnings in the coming quarters before buying the stock.
All of this may put a limit on the performance of CrowdStrike stock, so it may not be a growth driver for your investment portfolio at the moment.
Should you buy or sell/avoid CrowdStrike?
This depends on how comfortable you are with risk. If you are a cautious investor, you might consider avoiding or selling CrowdStrike stock (if you are not selling at a loss). There could be more downside than upside in the coming months.
But if you are risk-averse and an active investor, you may want to buy a few shares of this company that has an excellent track record of growth with the idea of holding for at least five years. Given the two positive points I mentioned above, there is reason to be optimistic about CrowdStrike’s ability to manage today’s difficult situation and continue to grow over the long term.
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Adria Cimino The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a position in and recommends CrowdStrike. The Motley Fool recommends Delta Air Lines. The Motley Fool has Disclosure Policy.
CrowdStrike Shares Drop More Than 30% — 2 Reasons to Buy and 1 Reason to Sell Originally posted by The Motley Fool
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