Ever since the IT outage that CrowdStrike (NASDAQ: CRWD) caused, its stock has been plummeting. Many investors may be wondering when the sell-off is over, as they’d like to use this weakness to buy more shares at cheaper prices.
However, this same cohort (I’m included) is also worried about catching a falling knife. Investors use this phrase to describe a situation when a stock is plummeting, as if you catch the knife on the wrong part on the way down, you’ll get cut.
So is now the time to buy? Or is it still too early to tell?
CrowdStrike’s product is highly integrated into its clients’ systems
CrowdStrike is a leader in the cybersecurity market. Its software helps protect network endpoints (like computers or phones) from breaches. Unfortunately, when an automatic update rolled out, millions of devices were crippled from within due to poor testing before launch. This is unfortunate, as cybersecurity firms usually only make the news if their software fails from a breach, not a self-inflicted wound.
In the aftermath of the failure, the stock is down around 30%, although some of that drop is due to broader tech stock weakness in the market. Still, this drop has erased all of 2024’s gains and then some.
But is it warranted?
The sell-off in CrowdStrike stock is pure speculation. Management has provided zero updates about how this failure is affecting its business. It’s practically guaranteed that some customers have canceled their CrowdStrike subscription, but that number is unknown. Furthermore, many of these companies are signed on a multiyear contract, so they either forfeited a lot of money or are sticking it out until the contract expires.
This is a key point, as this failure may not be front of mind when it comes time to renew. After all, the effects of this outage were painful, but only about 1% of all Windows devices were affected by the outage.
Another factor to keep in mind is how integrated CrowdStrike’s platform is. The Falcon platform has nearly 30 modules that offer its clients different capabilities. Considering that 65% of customers have at least five modules, switching away from CrowdStrike’s ecosystem would be hard. To recreate CrowdStrike’s offering, its clients would likely have to piece together software from multiple providers, which is both expensive and dangerous, as there may be unknown integration failures that could open a pathway for bad actors to take advantage of.
At the end of the day, CrowdStrike may have had one cataclysmic incident, but it still offers probably the best protection in the cybersecurity sector.
So, is it time to buy?
CrowdStrike’s stock is still expensive despite the sell-off
The market was well aware of CrowdStrike’s dominance before the event, which is why it traded for a hefty 29 times sales. After the sell-off, it’s down to around 17 times sales.
But that only resets the price to the point you could buy last December. Furthermore, 17 times sales really isn’t that cheap to begin with. As a result, it may be prudent to wait until CrowdStrike’s next quarterly conference call, when management will provide updates and adjust guidance (or pull it all together).
I’d be surprised if anything management says is taken as positive news from the market, which will likely drop the stock even more. After that point, investors can grasp the effect and determine if it’s time to buy CrowdStrike stock.
That call will occur on Wednesday, Aug. 28, and will be a must-listen. After that report, investors will better understand the effect this outage had on CrowdStrike’s business. But until then, investors are just guessing.
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Keithen Drury has positions in CrowdStrike. The Motley Fool has positions in and recommends CrowdStrike. The Motley Fool has a disclosure policy.
CrowdStrike: Catching a Falling Knife or Buying Opportunity? was originally published by The Motley Fool
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