Is CrowdStrike’s Big Mistake a Buying Opportunity?

Crowd strike‘S (NASDAQ: CRWD) The stock fell 11% on Friday, July 19, after an update to its cloud-based cybersecurity platform caused a global IT outage at banks, airports, hospitals, retailers, other businesses and government agencies. ATMs stopped working, flights were delayed and essential health services were taken offline.

CrowdStrike CEO George Kurtz said the incident was caused by a “flaw found in a single content update for Windows hosts” and that a fix “has already been deployed.” Microsoft (NASDAQ: MSFT)which was initially blamed for the outage because it only affected Windows systems, said it was working with CrowdStrike to resolve the issues.

CrowdStrike certainly made a huge mistake, and the market’s reaction is understandable. But others are wondering whether this news-driven pullback is a good buying opportunity. Are they right?

Why did the CrowdStrike outage cause so much damage?

In the past, most cybersecurity companies installed on-premises equipment to run their services. But this equipment was expensive, power-hungry, space-consuming, and required constant maintenance.

CrowdStrike solved these problems with Falcon, a cloud-native endpoint security platform that didn’t require on-premises devices. As a cloud-based platform, Falcon was easier to deploy, scale, and update than appliance-based platforms. It also allowed CrowdStrike to lock customers into recurring subscriptions and sell more cloud-based modules to increase revenue per customer.

These strengths have enabled CrowdStrike to experience explosive growth since its initial public offering (IPO) in 2019. From fiscal 2019 to fiscal 2024 (which ended in January), revenue grew at a compound annual growth rate (CAGR) of 65%, from $250 million to $3.06 billion.

CrowdStrike now serves 298 of the Fortune 500 and 538 of the Fortune 1000. This broad adoption, however, explains why CrowdStrike’s flawed update caused so much damage in such a short time.

How fast has CrowdStrike grown?

Over the past year, as macroeconomic headwinds forced many companies to cut spending, CrowdStrike’s annual recurring revenue (ARR) and total revenue growth slowed. But net new ARR growth has returned to double-digit year-over-year growth over the past three quarters, meaning the company continues to win new customers in a challenging market.

Data source: CrowdStrike. YOY = Year over Year. Note: Closing average annual revenue is the sum of existing average annual revenue and new net average annual revenue.

The story continues

CrowdStrike attributes the strong growth to market share gains, new government contracts and the rollout of more generative artificial intelligence (AI) capabilities for Falcon. By the end of the first quarter of fiscal 2025, 44% of its customers had adopted at least six of its modules, up from 43% in the fourth quarter and 40% a year earlier.

During the first quarter press conference call, Kurtz surprisingly attacked Palo Alto Networks‘ (NASDAQ:PANW) new platformization strategy (currently focused on free trials and deferred revenue agreements) — with the phrase “if a platform offers real value, you don’t have to give it up.” Unfortunately, CrowdStrike’s recent software glitch may prompt some companies to try Palo Alto’s more diverse mix of on-premises and cloud-based services instead.

At the time, CrowdStrike expected revenue growth of 30% to 31% in fiscal 2025. The company also expected to continue its five-quarter profitable streak on a generally accepted accounting principles (GAAP) basis. But given those estimates (which will likely be revised down) and the company’s current valuation of $67.5 billion, it still looks expensive at 17 times this year’s revenue.

Will this outage impact CrowdStrike’s long-term growth?

The big question now is how much this fiasco will hamper CrowdStrike’s long-term growth. Bulls will argue that the company’s leadership in cloud-native cybersecurity, its sticky cloud ecosystem, and the high cost of replatforming will prevent it from losing too many customers after the outage.

However, Kurtz admitted that it would take “some time” for the problematic update to be rolled back and all affected systems to be fully restored. CrowdStrike could also be hit with a number of lawsuits as a result of this debacle, and You’re hereCEO Elon Musk said his company has already “deleted” CrowdStrike from all of its systems.

The incident transformed CrowdStrike from little-known outside the tech and business worlds to a household name. Warren Buffett once said that it takes “20 years to build a reputation and five minutes to destroy it” — and the damage to CrowdStrike’s brand could certainly undermine its defenses against impatient competitors.

Microsoft has been quietly building its own cloud-based cybersecurity platform in recent years, making major investments and acquisitions. This embarrassing incident could prompt Microsoft to accelerate the development of these internal services, to reduce its reliance on CrowdStrike and other third-party cybersecurity platforms.

Is CrowdStrike’s Pullback a Buying Opportunity?

I have some CrowdStrike stock, but I think it will have to fall further in value before it is considered a bargain. It is still up over 90% in the last 12 months and is not cheap. We cannot yet assess the long-term impact of this catastrophic failure.

Should You Invest $1,000 in CrowdStrike Now?

Before purchasing CrowdStrike stock, you should consider the following:

THE Motley Fool, Securities Advisor A team of analysts has just identified what they believe to be the 10 best stocks Investors need to buy now…and CrowdStrike isn’t one of them. These 10 stocks could deliver monstrous returns in the years to come.

Think about when Nvidia I made this list on April 15, 2005…if you had $1,000 invested at the time of our recommendation, you would have $722,626!*

Securities Advisor offers investors an easy-to-follow blueprint for success, including portfolio building tips, regular analyst updates and two new stock picks each month. Securities Advisor has a service more than quadrupled the return of the S&P 500 since 2002*.

See all 10 actions »

*Stock Advisor returns as of July 15, 2024

Leo Sun holds positions in CrowdStrike and Palo Alto Networks. The Motley Fool holds positions in and recommends CrowdStrike, Microsoft, Palo Alto Networks, and Tesla. The Motley Fool has a disclosure policy.

Is CrowdStrike’s Big Mistake a Buying Opportunity? was originally published by The Motley Fool