Last month, CrowdStrike (NASDAQ: CRWD) faced one of technology companies' biggest nightmares: The cybersecurity giant launched a faulty software update that shut down the operations of customers around the world. Experts are calling it the biggest IT outage in history.
Companies faced blue error screens and couldn't access data needed to maintain everything from airplane flights to surgery schedules. So business came to a halt.
Unsurprisingly, CrowdStrike stock sank, and as of today, it's down more than 30% since the July 19 outage. The company quickly took action, repairing the software problem in just over an hour, but re-establishing customers' systems was a longer process. Today, CrowdStrike says 99% of Windows sensors are online, meaning most systems are operational.
This event wasn't due to a security breach, and that's excellent news for CrowdStrike because the company's business is keeping customers safe from cyberattacks. The outage didn't call into question CrowdStrike's ability to do its job. Still, investors are worred about the impact on the company and have hesitated to buy this stock on the dip -- even though it's been a high-growth leader in its field for some time.
What should you do right now? Below are two reasons to buy CrowdStrike and one reason to sell.
Reason to buy: The financial impact of the outage may be limited.
We still don't know the extent of the financial impact of the outage on CrowdStrike. After all, the company could lose customers and may face legal action. For example, Delta Air Lines says the event caused the cancellation of more than 5,000 flights and cost the company as much as $500 million, and now Delta plans to launch a lawsuit seeking damages.
At the same time, CrowdStrike's terms and conditions limit liability to customers' "fees paid." Of course, some customers may have signed a contract under different terms -- or legal teams may take a path that leads to additional compensation for their clients. But from the information we have right now, CrowdStrike might not bear a massive financial burden.
It's also important to remember that insurance carried by CrowdStrike or its customers may cover certain losses.
All of this means that, yes, CrowdStrike will face financial impact from the outage -- and we're likely to see this in the coming quarters -- but it could be manageable.
Reason to buy: A strong market position means CrowdStrike could weather the storm
CrowdStrike's entirely cloud-based artificial intelligence (AI)-driven security platform has helped it become a market giant, serving more than 60 Fortune 100 companies as of the fiscal 2025 first quarter. The company held the highest market share for modern endpoint security at more than 17%, as of June 2022, according to an IDC report.
Customers have flocked to the company's Falcon platform, available in 28 security modules that can be used together or separately. In the quarter, deals including eight or more modules soared 95%, and module adoption rates were 65% for deals including five or more.
All of this has led CrowdStrike's earnings higher over time and in the recent quarter. Annual recurring revenue (ARR) in the three-month period climbed 33% to more than $3.6 billion, and the company generated record operating cash flow and free cash flow, which came in at $383 million and $322 million, respectively.
Even if some CrowdStrike customers decide not to renew contracts, the company's market dominance and financial performance suggest it has what it takes to weather the storm.
Reason to sell: Near-term pressure may weigh on the stock
Though I think CrowdStrike's long-term story remains solid, the coming months and even the next year or so might not be easy. The company probably will deal with lawsuits and negotiating compensation with customers -- and it has the big job of winning back the confidence of both customers and investors.
At the same time, the stock isn't necessarily cheap, even after recent declines. It trades for 58x forward earnings estimates -- a reasonable price if the outage hadn't occurred but a level that some may consider pricey in light of the near-term uncertainty. These investors may wait for more clarity on how much the outage will impact CrowdStrike's earnings in the coming quarters before getting in on the stock.
All this could put the brakes on CrowdStrike's stock performance, so it may not be a growth driver for your portfolio right now.
Should you buy or sell/avoid CrowdStrike?
This depends on your comfort with risk. If you're a cautious investor, you might consider avoiding or selling CrowdStrike shares (if you're not selling at a loss). There could be more downs than ups in the coming months.
If you can handle risk and are an aggressive investor, though, you may want to scoop up a few shares of this company that boasts an excellent track record of growth with the idea of holding it for at least five years. Considering the two positive points I mention above, there's reason to be optimistic about CrowdStrike's ability to manage today's tough situation and continue delivering growth over the long term.
Should you invest $1,000 in CrowdStrike right now?
Before you buy stock in CrowdStrike, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and CrowdStrike wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $717,050!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.
*Stock Advisor returns as of July 29, 2024
Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends CrowdStrike. The Motley Fool recommends Delta Air Lines. The Motley Fool has a disclosure policy.
CrowdStrike Crashed More than 30% -- 2 Reasons to Buy the Stock and 1 Reason to Sell was originally published by The Motley Fool