Crowdstrike: steer clear or time to buy a bargain?
This stock is not for the faint-hearted, but a staggering slump in share price to its lowest since November last year has piqued the interest of overseas investing expert Rodney Hobson. Here’s what he’d do.
31st July 2024 10:01
by Rodney Hobson from interactive investor
Shares in technology stock CrowdStrike Holdings Inc Class A (NASDAQ:CRWD) have taken quite a nosedive since the company was responsible for a global IT meltdown that left passengers stranded at airports, hospitals unable to treat patients and offices unable to use their laptops. This could, though, be a good chance to get into what will in time prove to be a renewed success story.
Rarely has a stock fallen from grace so spectacularly. Crowdstrike is one of the biggest names in cybersecurity. Many investors – and computer users – were probably unaware of how widely used its products are. Clearly it was well trusted by Microsoft Corp (NASDAQ:MSFT) as its cloud-based products are widely used in Windows, hence the scale of the devastation.
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The irony is that Crowdstrike’s Falcon sensor was designed to protect computer systems from being crashed by malicious software and hackers. It is installed in servers and individual computers to look out for anything suspicious. Instead, it was a software bug in the system itself that caused the crash in Windows-operating systems.
Crowdstrike was founded in 2011 and was listed on Nasdaq eight years later. It has grown rapidly to command about 15% of the global security software market. Revenue has been growing at 66% a year since the listing, underpinned by the company’s subscription service that means sales are recurring and predictable. About 90% of sales are now through subscriptions, where gross margins are a remarkable 78%.
That is well and good, but the damage to Crowdstrike’s reputation is potentially enormous. So are the damages that Microsoft and its users may demand for this outage, although many companies will be covered by their own insurance.
Crowdstrike has been cautious about revealing the specifics of what caused the computer crash, but then you would not expect it to be giving away its secrets to rivals. It says that it has added a new check in its quality control and has promised to improve internal testing, with changes to be rolled out gradually so that any future disaster is limited in its scope. The company has grown so quickly that a pause for thought was well overdue.
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Realistically, Crowdstrike will recover from the disaster, and will probably do so faster than many investors felt in the initial reaction to the largest computer outage ever suffered. We need protection against hackers and malware, and alternatives that can be installed on a vast scale are pretty limited.
Microsoft itself has continued virtually unharmed from its own self-inflicted disaster when it introduced the Vista Windows system without testing it properly. In that instance, Microsoft even refused to believe it was at fault. At least Crowdstrike has the advantage of acknowledging it was culpable, the first step to seeing the mistake does not happen again.
Another reassuring aspect is that Crowdstrike’s system was not infiltrated by a malicious outsider, which would have been far worse for its reputation.
Expect the company to offer discounts and free services to its customers to keep them sweet. That will affect revenue, margins and profits for the rest of this year at least.
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Crowdstrike shares had moved erratically even before the outage sent them plunging from $390 early July to an intraday low of just above $226, a drop of well over a third. They traded at only $40 in March 2020, then they shot up to $280 and slumped back below $100 before rising to a new peak earlier this year.
Source: interactive investor. Past performance is not a guide to future performance.
Hobson’s choice: This is not a stock for the fainthearted, nor for the income seeker who will baulk at the remarkably high price/earnings ratio of around 480 and at the lack of a dividend. However, active traders could do well to get in now and hope for another surge before taking profits. Buyers are already moving back in.
Just don’t expect to score the sort of profits enjoyed by investors who bought on my recommendation at $138 back in November 2020.
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