CrowdStrike (CRWD +8.09%) has been in the news for all the wrong reasons of late. Last month, the cybersecurity company released an update that led to massive outages affecting companies all over the world.
What started off as a strong year for the company has quickly turned into a disastrous one. Prior to the outage, shares of CrowdStrike were up more than 50% year to date. Now, they're down 5%.
Despite the recent sell-off, investors shouldn't assume the worst is over.
NASDAQ: CRWD
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Legal bills and costs could pile up for CrowdStrike
One of the largest impacts the outage had was on airlines. Delta Air Lines canceled thousands of flights over several days, costing its business an estimated $500 million. The airline is now threatening legal action against CrowdStrike. Meanwhile, CrowdStrike's legal team contends the cybersecurity company did offer to help Delta during the outage, but the airline ignored the offer.
CrowdStrike prides itself on having many of the world's top companies as customers, which means Delta won't be the only business seeking damages stemming from the outage. Fortune 500 companies in the U.S. (excluding Microsoft) could see their financial losses top $5.4 billion due to the outage, according to estimates from insurance company Parametrix. CrowdStrike could soon face a series of lawsuits related to the event.
Could CrowdStrike's bottom line go back into the red?
CrowdStrike's business has grown significantly in recent years (its top line has more than tripled since 2021), and it has become profitable on a consistent basis. Net profit margins still aren't terribly high; in the trailing 12 months, it earned a profit of $131.7 million on revenue of $3.3 billion. But things have been moving in the right direction.
If the company is forced to allocate significant resources to fighting legal battles, that could be enough to push the company's bottom line into the red again. Plus, the company will likely need to invest more into its operations to ensure proper safeguards are in place to avoid another outage in the future. On top of that, there's the possibility CrowdStrike loses customers over these developments, so it may need to increase sales and marketing spending. All of these factors increase the likelihood CrowdStrike may struggle to turn a profit in future quarters.
Investors may be better off avoiding CrowdStrike stock
Despite its sharp drop in value in recent weeks, CrowdStrike stock is still up more than 160% in the past five years. Even now, it's trading at 18 times revenue and 23 times book value. This is still a very expensive stock to own.
Expensive stocks are OK to hold if their businesses are generating strong numbers on their top and bottom lines. That may not be the case anymore for CrowdStrike.
There are better tech stocks investors can buy right now. While it may be tempting to capitalize on the recent sell-off, CrowdStrike is no bargain, and things can still get far worse before they get better for the company.
