The last few weeks have easily been the worst in cybersecurity company CrowdStrike's (CRWD +1.41%) history. An software update caused problems across the globe. It grounded flights, sending airlines and travelers scrambling in jam-packed airports to find a fix and make it to their destinations. Hospitals were forced to cancel surgeries, public transit in some cities saw problems, and some financial institutions had online banking affected. Suddenly, CrowdStrike became a primary topic in mainstream news for an extremely negative reason.
Investors raced to the exits after the July 19 IT snafu, decimating the stock. As you can see below, it fell more than 40% off a recent high in only a few days.
While this was undeniably a disaster for CrowdStrike, the company can recover. Here's how and why.
Two important hurdles
CrowdStrike CEO George Kurtz is apparently being called into the corporate equivalent of the principal's office to explain what went wrong. That's right, congressional committees are reportedly calling on Kurtz to testify due to the magnitude of the outage. No date for this meeting has been released yet, although CrowdStrike admits it is in contact with congressional subcommittees.
I'm encouraged by the fact that the company introduced accelerated remediation techniques to fix the software issue and has been forthcoming regarding what happened, why, and what CrowdStrike is doing to fix it and prevent a similar problem in the future. This openness is more critical than many may realize. Often, fallout from trying to cover up or minimize an issue damages a company's reputation more than the incident itself. Kurtz is, by accounts, a charismatic leader. If he can go before Congress, explain the situation, apologize to those affected, and deliver a solid plan to prevent a similar problem in the future, this will be one massive hurdle cleared.
NASDAQ: CRWD
Key Data Points
The second hurdle for CrowdStrike is strengthening relationships with major customers and surviving the financial burden. Delta Airlines is taking legal action to get money from CrowdStrike and Microsoft for losses estimated to be $350 million to $500 million. In total, estimates of losses for Fortune 500 companies due to the IT outage are $5.4 billion. This is not small potatoes.
However, CrowdStrike likely has liability insurance, any potential settlements will likely be lower than the total loss, and sharing responsibility with deep-pocketed Microsoft should prevent the liability from being fatal to CrowedStrike. The company reported $4.4 billion in cash and receivables as of its most recent quarter. Settling things amicably with customers in a way that does not drain its coffers is a critical step to recovery.
Is CrowdStrike stock a buy?
In addition to there being a clear path for how CrowdStrike can recover from here, the IT outage also shows how critical CrowdStrike is to systems worldwide. While there are competitors, switching costs are high, and CrowdStrike has terrific technology and know-how. This storm will likely blow over once the hurdles mentioned above are cleared.
CrowdStrike's financial results are impressive. In Q1 FY25 -- the quarter ended April 30, 2024 -- annual recurring revenue (ARR) grew 33% year over year to $3.65 billion. Total sales hit $3.3 billion over the trailing 12 months, an increase of more than 155% over three years, as shown below.
CRWD Revenue (TTM) data by YCharts
In addition, CrowdStrike is becoming a cash cow. Its free cash flow (FCF) hit $322 million last quarter, with 42% growth and an impressive 35% margin. The company produced $1 billion in FCF in the previous 12 months with a 31% margin. The impressive cash flow has allowed CrowdStrike to build a fortress-like balance sheet that features $3.7 billion in cash against just $740 million in long-term debt.
In addition, the stock's valuation is suddenly much more palatable. CrowdStrike's price-to-sales (P/S) ratio has fallen from a nosebleed 29 down to 16. As shown in the chart below, it is closing in on its valuation during the stock market's 2023 lows.
CRWD PS Ratio data by YCharts
Before the July IT outage, CrowdStrike's forecast was to exceed $5 billion in ARR by fiscal 2026, which ends in January 2026. If management can remediate this incident and still hit this target, the company's current $53 billion market cap will be a terrific long-term bargain.
However, despite these reasons for optimism, investors need to understand the risks. A congressional hearing could go poorly, large customers could leave, and CrowdStrike could end up on the hook for billions of dollars in damages. The stock will also probably be quite volatile for a while. Investors should be careful about how much of their portfolio is exposed to risky stocks. Take this quiz to help determine your personal risk tolerance.
The CrowdStrike outage was extremely damaging, but the stock's collapse could be a buying opportunity for long-term investors. I don't know if management can clear all the hurdles and maintain the company's excellent financial results. But if it can, the stock will likely reward investors handily in the long run.
