Is CrowdStrike’s Big Mistake a Buying Opportunity?

Crowd strike‘s (NASDAQ: CRWD) The company’s stock price fell 11% on Friday, July 19, after an update to its cloud-based cybersecurity platform triggered 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 had already “been deployed.” Microsoft (NASDAQ: MSFT)which was initially blamed for the outage because it only occurred on 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 represents 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 devices to run their services. But this hardware was expensive, consumed a lot of power, took up a lot of space, and required constant maintenance.

CrowdStrike solved these problems with Falcon, a cloud-native endpoint security platform that required no on-premises devices. As a cloud-based platform, Falcon was easier to install, 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 helped CrowdStrike grow like a herb since its initial public offering (IPO) in 2019. From fiscal 2019 to fiscal 2024 (which ended in January), its revenue grew at a compound annual growth rate (CAGR) of 65%, from $250 million to $3.06 billion.

CrowdStrike now serves 298 Fortune 500 companies and 538 Fortune 1000 companies. However, this widespread adoption 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 rein in spending, CrowdStrike’s annual recurring revenue (ARR) and total revenue growth slowed. But its net new ARR growth has increased by double-digit percentages year over year for the past three quarters, meaning the company has continued to win new customers in a challenging market.

Data source: CrowdStrike. YOY = year-over-year. Note: The end-of-period average annual rate of return (ARR) is the sum of the pre-existing average annual rate of return and the new net average annual rate of return.

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 conference call, Kurtz notably criticized Palo Alto Networks‘ (NASDAQ:PANW) The new platforming strategy (currently focused on free trials and deferred revenue agreements) is that “when a platform delivers real value, you don’t have to give it up.” Unfortunately, CrowdStrike’s recent software glitch may well prompt some companies to try Palo Alto’s more diverse mix of on-premises and cloud-based services.

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

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

The big question now is how much of a drag this fiasco will put on CrowdStrike’s long-term growth. Bulls will argue that the company’s leadership in cloud-native cybersecurity, its sticky cloud ecosystem, and the high costs of switching to another platform will prevent it from losing too many customers as a result of the outage.

However, Kurtz admitted that it would be “some time” before the problematic update is rolled back and all affected systems are fully restored. CrowdStrike could also be hit with a number of lawsuits following this debacle, and You’re hereFacebook CEO Elon Musk said his company has already “removed CrowdStrike” from all of its systems.

The incident also transformed CrowdStrike, previously little known outside of tech and business circles, into a household name. Warren Buffett once said that it takes “20 years to build a reputation and five minutes to ruin it” — and the damage to CrowdStrike’s brand could certainly erode its defenses against fierce competitors.

Microsoft has been quietly building its own cloud-based cybersecurity platform over the past few years, at great expense through 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.

So is CrowdStrike’s pullback a buying opportunity?

I own CrowdStrike shares, but I think the stock would have to fall further before it would be considered a bargain. It is still up over 90% in the last 12 months and is not cheap – and we can’t yet assess the long-term impact of this disastrous outage.

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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