The dust is finally starting to settle from CrowdStrike's (CRWD +8.09%) massive global IT outage. Now it's time to assess the damage to CrowdStrike's stock, reputation, and prospects.
In short, the company is in a nasty pickle. Its stock fell more than 40% following the outage, and the company is already the target of at least one lawsuit.
These are just some of the reasons CrowdStrike may struggle to regain its former status as a growth stock darling. Here's what that may mean for investors.
Image source: Getty Images.
First, put out the fire
In any crisis, the first step is to alleviate the problem at hand -- to put out the fire. CrowdStrike has done that. Broadly speaking, the company admitted its mistake early on, provided guidance on how to solve the problem, and got most customers back up and running quickly.
That said, not every customer -- or person impacted by the outage -- is going to accept CrowdStrike's mea culpa and move on.
NASDAQ: CRWD
Key Data Points
For starters, a group of frustrated travelers filed a class action lawsuit alleging that they incurred additional travel-related expenses due to flight cancellations caused by CrowdStrike's botched software update. The plaintiffs are seeking compensatory and punitive damages. Those damages could add up for CrowdStrike, as more than 5,000 flights, or roughly 5% of all global flights on July 19, were canceled due to the outage.
What's more, CrowdStrike could also face lawsuits from its customers. Publicly, Delta Air Lines has been the most outspoken, with CEO Ed Bastian trashing CrowdStrike and blaming the company for Delta's weeklong series of flight cancelations and delays. Bastian estimated that the outage cost Delta $500 million and that CrowdStrike "haven't offered us anything."
What's worse, it's highly likely that other customers are similarly peeved but haven't complained publicly.
In any event, the overall cost of this outage to CrowdStrike could be massive. Estimates of the outage's total cost have reached as high as $10 billion. So, while it's unclear how much -- if any -- of that figure CrowdStrike might need to pony up, it's a sizable concern that adds an enormous amount of uncertainty to a company that remains early in its business life cycle and wants to focus on using its $3.7 billion in cash on hand to grow its business -- not to pay lawyers or settle lawsuits.
However, what is clear is that CrowdStrike is now entering the most crucial phase of this crisis, which will likely determine its long-term prospects: managing its customer relationships.
Can CrowdStrike keep its customer base?
In the end, this is what it all boils down to for CrowdStrike. If the company can't keep its existing customer base, its business prospects will dwindle. Remember, CrowdStrike is a growth-oriented company with little in the way of profits. In its most recent quarter (the three months ending on April 30, 2024), CrowdStrike reported only $43 million in net income -- despite generating $921 million in revenue for the same period.
Almost all of the company's revenue (95%) comes from subscriptions paid by customers for its security products. Crucially, those products are modular, allowing customers to add (and remove) different security features. Therefore, unhappy customers could potentially scale back their spending on CrowdStrike products by canceling their subscriptions for certain modules. That is, if they don't walk away from their subscriptions altogether.
What's perhaps worse for the company is that some potential customers might now be hesitant to establish or expand their relationship with CrowdStrike.
In either case, CrowdStrike's revenue growth -- the lifeblood of any growth stock -- could take a serious hit in the coming quarters as the reputational damage from this outage is revealed. That, more than anything else, is why CrowdStrike is not the company -- or the stock -- it was just one month ago. It will have to sort out this crisis of confidence before it can regain its former status.
CRWD Revenue (Quarterly YoY Growth) data by YCharts
Investors should exercise extreme caution with CrowdStrike stock. The company has sustained a serious blow, and prudent investors should wait and see how the company performs in the coming quarters. On the one hand, CrowdStrike could rebound from this crisis and continue on its path toward becoming a leader in the red-hot cybersecurity sector. Then again, customers could turn on the company, which would undercut the growth thesis that surrounds CrowdStrike's stock.
In this case, investors would be wise to wait and see.
