CrowdStrike Stock Drop: A Contrarian Buying Opportunity or a Sign of Deeper Issues?

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Between June 2019 and June 2024, CrowdStrike ($CRWD) stock surged over 500%, making it one of the top-performing cybersecurity stocks on the market. However, everything changed in July when a devastating platform glitch led to the largest IT outage of all time, estimated to have cost over $5 billion. This significant incident has impacted CrowdStrike’s stock performance and raised concerns among investors.

CrowdStrike's value plummeted by 40% in just two weeks, and the sell-off accelerated yesterday after a report that Delta Airlines (DAL) hired renowned attorney David Boies to seek compensation for its outage losses.

This event has spooked investors, leading many to sell their stakes amid fears of long-term repercussions. Despite the current volatility, CrowdStrike stock could actually present a contrarian buying opportunity for long-term investors. Here’s why.

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The Short-Term & Long-Term View

The recent CrowdStrike platform glitch has stirred concerns about the company's future growth and competitive position. Investors fear increased customer churn and potential new customers opting for alternatives. These concerns are valid and could impact CrowdStrike in the short term. Deal-making might slow, sales cycles could lengthen, and impulsive leaders, like Elon Musk, might decide to cancel their deals with CrowdStrike.

While competitors like SentinelOne ($S) could capitalize on the situation to gain market share, CrowdStrike's robust market position and product quality may help it weather the storm. Despite the 40% sell-off, CrowdStrike still boasts a market value of $63 billion, nearly ten times higher than Sentinel's market cap, and it made $3 billion in revenue in FY24, five times higher than Sentinel's revenue over the same period. The company's size and scale suggest that it’s too big to fail based on a single incident. A series of such incidents would be required to seriously jeopardize the company's credibility in the cybersecurity community.

CrowdStrike offers a world-class cybersecurity product that companies cannot afford to ignore. Its flagship Falcon platform is a comprehensive, cloud-native product, offering endpoint protection, threat intelligence, cloud security, and identity protection. This integrated approach provides organizations with a unified solution to address a broad spectrum of security needs, leading to platform consolidation. As you can see below, more than 65% of CrowdStrike’s customers used more than five products as of Q1, while deals involving eight products or more grew by 95% y/y. These statistics show that customers are increasingly relying on CrowdStrike’s platform strategy, using a single vendor to meet various cybersecurity needs.

Although main competitors like SentinelOne and Palo Alto Networks ($PANW) offer high-quality solutions, their offerings are not as comprehensive as CrowdStrike’s Falcon platform. Falcon's ability to displace niche cybersecurity solutions and drive consolidation for companies ultimately lowers the total cost of ownership.

Meanwhile, the rapid growth of the cybersecurity industry can support CrowdStrike’s long-term growth. The AI-native security market, expected to be a $100 billion market in 2024 and forecasted to grow to $225 billion by 2028, is a hyper-growth industry. CrowdStrike is well-positioned to be one of the biggest beneficiaries due to its established market position, which is difficult to undermine after a single incident.

Best-In-Class Financial Performance

CrowdStrike's comprehensive platform has fueled massive growth. With an Annual Recurring Revenue of $3.6 billion as of Q1, it stands as one of the largest cybersecurity firms globally and continues to expand rapidly. Its Q1 revenue increased 33% y/y to $333 million, and full-year revenue was projected to grow at the same rate as of Q1. Although the company might lower its full-year growth outlook due to the outage, its growth momentum remains robust.

The outage will likely dampen growth in the coming quarters. However, if CrowdStrike executes well and prevents similar incidents in the future, it can reaccelerate its growth given the massive market opportunity and its solid foundations. 62 of the Fortune 100 companies are CrowdStrike customers, underscoring the company's critical role in the global cybersecurity landscape.

Despite the recent outage, CrowdStrike remains a well-managed, founder-led company with exceptional profitability metrics. It’s already profitable on a non-adjusted basis and continues to increase its operating leverage. In Q1, it generated $383 million in operating cash flow, translating to a super-high OCF margin of 41%. The company’s blend of rapid growth and strong cash flow margins places it in an elite category within the software sector. However, the global outage will likely impact the company's cash flow metrics in the near term. It may need to compensate impacted companies and increase spending on sales, marketing, and R&D to mitigate the outage's negative effects. While the IT incident will likely affect CrowdStrike's bottom line, it doesn’t change the company's fundamentally profitable business model over the long haul.

What About Valuation

CrowdStrike's stock has been heavily impacted by investor concerns about the unknown consequences of the global outage. However, after a 40% sell-off in less than a month, much of the anticipated challenges have likely been priced into the stock. At current prices of around $230 per share, CRWD trades at a Price/Free Cash Flow ratio of around 50, still higher than other high-quality cybersecurity names like Zscaler ($ZS) and Palo Alto Networks. This premium may appear high but is justified given CrowdStrike's higher FCF margins and faster growth rate.

What Else

CrowdStrike has entered a period of uncertainty that may last at least a couple of quarters. Delta Airlines' CEO just announced that the outage cost the airline $500 million, and the company will likely seek compensation for these costs. The short-term impact could be significant, given the global scale of the outage, but this may also present a contrarian opportunity for long-term investors. If CrowdStrike prevents similar incidents in the future and successfully manages the PR damage, there is nothing to stop the company from fully recovering and regaining lost ground. The current stock price may be an attractive entry point for investors willing to accept short-term volatility but believe in the company's long-term prospects.

Read Next: https://www.thelattehq.com/p/zscalers-incredible-q1-earnings-justify-even-higher-prices

CROWDSTRIKE RATING

Short Term: Moderate Buy

Long Term: Moderate Buy

I’m long ZS, CRWD.

The boring Disclosures: Newsletters express the opinion of the authors. Nothing in this email is a buy or sell recommendation. I'm not a financial advisor; make your own decisions.