It’s been a rough couple of weeks for CrowdStrike (CRWD:NASDAQ) after what some have called the world’s biggest IT outage caused banks, hospitals, and airports to ‘go dark’. The question for investors now is that following the more than 30% share price crash, is the stock worth buying?
Shares believes the answer is Yes, but investors who do so should be aware of what could go wrong.
First, what actually happened? The massive technology blackout affected millions of users in the early hours of 19 July 2024 after the cyber defence giant released a buggy security update which was missed, causing vital Microsoft (MSFT:NASDAQ) systems to crash.
While the company is still investigating the details of what went wrong, this was not a security breach, the firm said, and the faulty update was quickly spotted with fixes released by both CrowdStrike and Microsoft. ‘We find credence in this response, considering that within hours of the outage, companies with operations affected had been able to gradually resume their services’, said analysts at Morningstar.
Within a few days, 97% of connected devices affected were back up and running, according to CrowdStrike executive chairman George Kurtz.
CHALLENGES TO FACE
Arguably, the biggest problem for CrowdStrike ahead will be managing reputational damage, although we can’t rule out compensation payouts and even lawsuits, albeit the latter look highly unlikely.
We know good reputations can take years to build and moments to destroy, but the fact this was not caused by a breach of the company’s defence systems remains encouraging.
After all, it is the robustness of its cyber defences which has kept CrowdStrike at the forefront of the cybersecurity industry for years and made it one of the industry’s hottest stocks to buy. For example, over the last three years, its revenues have grown by around 250% versus roughly 100% for rivals Palo Alto Networks (PANW:NASDAQ) and Fortinet (FTNT:NASDAQ).
This is because CrowdStrike offers a compelling continuous-monitoring cybersecurity proposition. A visit to the cinema is a decent analogy. While some firewall providers do what ushers do, check your ticket then let you pass, CrowdStrike continues to watch you inside the auditorium, and if malicious or odd behaviour is detected the platform can act quickly and isolate it so it doesn’t spread.
‘Channel conversations we had before the outage occurred implied CrowdStrike was taking share and performing ahead of expectations for the quarter’, say analysts at investment bank JPMorgan.
However, post-outage discussions reflected ‘increased uncertainty’ with some deals delayed and partners still assessing the incident’s impact on results for the quarter and momentum for the rest of the year.
These uncertainties may persist for a while, at least for the next couple of quarters. Let’s not sugarcoat it, until financial markets have evidence of the real impact on CrowdStrike’s growth and profits, the stock could remain volatile.
Yet cybersecurity spend isn’t going away, and this event could see boardrooms assign more resources to digital defences as part of multi-supplier deals where more than one provider is recruited.
ANALYSTS STILL BACK LONG RUN POTENTIAL
In short, most analyst responses we have seen continue to see a very bright future for CrowdStrike, even if the near-term remains dogged with uncertainty. Rosenblatt Securities, for example, views this as a temporary setback in an otherwise strong growth trajectory, supported by the company’s solid fundamentals and leading market position.
Analysts remain confident in the company’s ability to learn from this experience, enhance its quality assurance processes and emerge as an even more reliable partner for its customers.
Before the outage, CrowdStrike stock traded on a P/E (price to earnings) multiple close on 80, partly because it made its first ever net profit in the year to 31 January 2024.
This year should see net profit surge, according to post-outage consensus, from $89.3 million last year to $992 million, on $3.98 billion of revenue, primed for more than 20% growth.
By fiscal 2027, forecast net profit could be close to $1.7 billion on more than $6 billion of revenue, implying a P/E of 42 times. We believe this is the sort of long-run growth trajectory which demands a premium valuation and could see the stock rally back to Rosenblatt’s $350 target price over the next 12 to 18 months.
These articles are provided by Shares magazine which is published by AJ Bell Media, a part of AJ Bell. Shares is not written by AJ Bell.
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Investors acting on the information in these articles do so at their own risk and AJ Bell Media and its staff do not accept liability for losses suffered by investors as a result of their investment decisions.
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