CrowdStrike (CRWD +0.61%) stock has been under fire of late as a global tech outage involving its software led to a sharp sell-off in its valuation. Regardless of the reason for the outage, such a wide-scale effect which impacts multiple industries and companies all over the world is not good for business, especially not when you're a company that is trying to build a brand synonymous with trust and cybersecurity.
Are investors overreacting to the recent news, or is the stock in deep trouble, and likely due for a bigger decline in the weeks and months ahead?
NASDAQ: CRWD
Key Data Points
Is faulty code better or worse than a hack?
Investors and consumers often hear of data breaches crippling a company's operations, but in CrowdStrike's case, it blamed a widespread outage in July on faulty code in an update to its Falcon software. That update impacted Microsoft's Windows operating systems, which is relied on by companies around the world.
It may be sobering to learn that it wasn't due to a data breach or hackers, but in the end, does it really matter? What may be most concerning is that code wasn't adequately checked before rolling out to all of CrowdStrike's customers. Had the company thoroughly tested the update, or at least rolled it out to a select number of customers first, it could have prevented the debacle which took place a few weeks ago.
At the end of the day, if faulty code in an update led to a crash, then faulty, unchecked code in the software could also be exploited in a data breach. CrowdStrike's CEO assuring investors it wasn't a data breach is of little assurance because a lack of quality control could still lead back to that problem. Not thoroughly checking and testing code is how vulnerabilities are uncovered. Breaches can happen when code is tested and working properly, let alone when it isn't.
The good news: Investors often have short memories
As concerning as this may be, the episode may not necessarily be crippling to CrowdStrike's business. The company can recover, and while it seems horrible right now and damaging to the brand, stocks can and often recover from bad press.
A great example of that is Equifax, a company whose business centers around protecting confidential credit information. In 2017, there was a data breach which affected 150 million people. The company ended up having to pay $700 million in fines and penalties as a result. But as bad as that was for the company at the time, the stock recovered.
Since 2017, shares of Equifax gained more than 130%. That's just one example, but there are many others where investors forgot about negative press even when it raises concerns about a company's core operations.
Like in the case of Equifax, investors and companies may have lost trust in CrowdStrike's brand and its core capabilities. Whether it was a data breach or a faulty line of code is irrelevant, as the damage is still done to the brand. But like with Equifax, CrowdStrike can potentially recover from this.
Is CrowdStrike a bad-news buy?
In some cases, shopping a stock when it faces bad news can make for a great buying opportunity. But with CrowdStrike, I don't believe it is. And that's because a big obstacle is that the stock is trading at a massive premium -- more than 60 times its estimated future profits. It's hard to justify that kind of a premium for any kind of stock, much less one that may have lost the trust of many of its customers.
I don't doubt that CrowdStrike can recover in the long run, but it could take a while due to its inflated valuation. I think investors won't be willing to pay as high of a premium for the growth stock anymore, and I would steer clear of it as there could be more headwinds coming for CrowdStrike, especially as the company updates its guidance and investors start to learn the full effects the outage has on its business.
