Picture this: just a short while back, CrowdStrike (NASDAQ: CRWD) found itself in the eye of a tumultuous storm. An ill-fated software update triggered a massive IT outage, sending shockwaves across industries, from airlines to healthcare facilities, with blue screen errors grinding operations to a halt worldwide. Despite promptly issuing a fix, some customers grappled with disruptions for weeks. The fallout? A staggering estimated loss of $5.4 billion for Fortune 500 firms, according to Parametrix.
In the aftermath, CrowdStrike’s shares plunged by over 35% in the ensuing fortnight. However, the stock has since staged a recovery, ascending nearly 30% from its nadir on August 2. Providing insights into the impact of the incident, the cybersecurity juggernaut updated its stakeholders during the earnings report in late August and at the recent Fal.Con conference in Las Vegas. Let’s delve into the particulars and discern if the stock merits consideration.
Image source: Getty Images.
Diving Into CrowdStrike’s Falcon
To begin, let’s encapsulate CrowdStrike’s core business. Armed with Falcon, an AI-driven cloud security platform, the company gathers data far and wide within an organization, proactively identifying potential threats. Falcon, a nimble solitary agent, bolsters its efficacy through 28 optional modules catering to various security dimensions such as identity and cloud security.
CrowdStrike’s revenue trajectory has been stellar, buoyed by its knack for meeting clients’ entire cybersecurity requisites via a user-friendly software-as-a-service model. Consequently, the stock has soared over 380% in the past half-decade.
Following the July debacle, the outage’s temporal proximity to the quarter’s end impeded the closure of new contracts, diverting the company’s focus from business development to aiding affected clients. This resulted in a deferment of over $60 million in anticipated deals for the quarter. Nevertheless, CrowdStrike foresees sealing these deals in subsequent quarters.
Encouragingly, the bulk of pre-outage deals are in the pipeline, upbeat post-outage contracts have been secured—including a substantial eight-figure pact with an enterprise software entity—and most patrons have reaffirmed their allegiance to CrowdStrike.
Impressive Cash Flow Records
The firm delivered robust second-quarter results, with annual recurring revenue skyrocketing over 30% to $3.8 billion, while operating and free cash flow hit zeniths. CrowdStrike remains steadfast in its aim to hit the $10 billion ARR mark by fiscal 2031.
Yet, the repercussions of the July incident endure. The company anticipates that its “customer commitment packages” aimed at assuaging clients will shave around $60 million off new ARR and subscription revenue by year-end. The horizon remains clouded by various headwinds impacting forecast visibility, such as protracted contract signings necessitating heightened scrutiny, occasionally mandating approvals at the executive echelon.
Add to the mix the specter of potential legal entanglements stemming from the outage; for instance, Delta Air Lines has hinted at litigious inclinations. Notwithstanding, contractual stipulations and insurance coverage may mitigate potential expenses associated with the incident.
Unpacking Falcon Flex’s Importance
Admittedly, the outage has cast a shadow over CrowdStrike, potentially affecting its trajectory. However, it hasn’t stalled the company’s expansion. Enter “Falcon Flex”, a program mandating commitment to Falcon while affording liberty to cherry-pick modules during the pact. Leveraging Flex, CrowdStrike can sweeten customer commitment packages, potentially spurring augmented spending over time.
Returning to the pivotal inquiry: Is CrowdStrike a prudent investment? Examining valuations, the stock presently trades at a less stratospheric multiple of 77x forward earnings estimates compared to the triple-digit figures pre-outage. Nevertheless, it doesn’t rank as the most budget-friendly growth stock in town. Comparatively, AI chipmaker Nvidia and e-commerce behemoth Amazon hover around 40x forward earnings estimates.
That being said, CrowdStrike boasts a commendable earnings track record. Despite a significant setback, the company soldiers on with growth, retaining its clientele, forging new alliances, and weathering the storm. While challenges persist, the long-term prospects gleam brightly. Hence, growth-oriented investors eyeing a sturdy buy-and-hold contender should give this cybersecurity titan due consideration.
Identifying the Ideal Investment
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