Cybersecurity company CrowdStrike (CRWD +6.13%) was once a hot stock in its industry. Shares soared from a 52-week low of $141.97 last August to a high of $398.33 on July 9.
That changed days later on July 19 when, after CrowdStrike made what should have been a routine software update, an error in the code caused massive disruption to computer systems around the globe. Airlines, banks, hospitals, and other organizations were suddenly unable to conduct business as usual.
Understandably, the company's share price plunged after the incident. Within a day, CrowdStrike stock dropped from $343.05 to $304.96. Shares continued sinking for weeks and remain below $300 at the time of this writing.
Does the drop in price create a buying opportunity? Let's take a look at CrowdStrike to arrive at an answer.
NASDAQ: CRWD
Key Data Points
Evaluating the impact of CrowdStrike's mistake
Despite the catastrophic technical glitch, the question of whether to invest in CrowdStrike ultimately depends on the company's performance over the long run. To assess this, it's helpful to consider the implications and aftermath of the company's software error.
For starters, investors should know CrowdStrike's mistake led to undeniable damage to its customers. Some estimates put the financial impact of the tech glitch at over $5 billion. The incident has led to lawsuits, even by CrowdStrike shareholders against the company. Other repercussions could include angry customers leaving CrowdStrike for one of its many competitors, or the loss of would-be customers that once considered the firm, but may now choose a rival.
To measure the potential loss of customers to CrowdStrike's business, you can look at the firm's annual recurring revenue (ARR). CrowdStrike uses a software-as-a-service (SaaS) model, charging customers a subscription fee for access to its technology. ARR represents the value of a customer's subscription contract over an annual period. If CrowdStrike begins losing business because of the July 19 incident, its ARR will show it. For example, ARR growth may slow or even decline year over year.
To evaluate if ARR is being affected, let's look at its performance before the July 19 software incident to use as a baseline. CrowdStrike's ARR for its fiscal first quarter, ended April 30, was $3.7 billion. This represented 33% year-over-year growth. Of that amount, $212 million was net new ARR, a 22% year-over-year increase, and a Q1 record high for the metric. This indicates how much customers were flocking to CrowdStrike.
In fact, the number of deals involving adoption of eight or more features in its platform, called modules, grew 95% year over year in fiscal Q1. Greater module adoption means more money for CrowdStrike since customers must pay for each module.
The aftermath of CrowdStrike's tech glitch
Keep in mind it can take a few quarters for ARR to show a material impact. Customers will need time to evaluate alternatives to CrowdStrike and make a switch. Some nearing the end of their subscription term may simply allow it to expire and not renew. That said, CrowdStrike may escape any noticeable change in ARR. That's possible because, to its credit, the company was transparent about its mistake and worked to quickly rectify the situation.
At the time of the incident, CEO George Kurtz stated, "The outage was caused by a defect found in a Falcon content update for Windows," and that "this was not a cyberattack." Falcon is the name of CrowdStrike's cybersecurity platform, and a software change to it caused many computers running Microsoft's Windows operating system to crash.
In addition, CrowdStrike took steps to prevent this problem from happening again. For instance, it created additional measures to test its software code before deploying it to customers, and it now allows clients more control over how new updates are implemented on their IT systems.
CrowdStrike's response to its mistake was commendable. If it managed to restore customer confidence in its platform, the firm is likely to see a continuation of its history of revenue growth that stretches back to its 2019 initial public offering.
Data by YCharts.
To buy or not to buy CrowdStrike stock
Investor confidence seems to be increasing in CrowdStrike's ability to convince customers the software glitch was a one-off and unlikely to happen again. This is evidenced by the recent rise in share price. After dropping as low as $217.89 on Aug. 2, the company's stock finally reversed course and began climbing.
Wall Street also sees upside for the stock. The current consensus among Wall Street analysts is an overweight rating with a median price target of $330 for CrowdStrike shares.
If you want to take a cautious approach, you can watch CrowdStrike's performance over the next few quarters to see how its ARR compares to its fiscal Q1 results. But if you want to grab shares while the stock is still well below its 52-week high, now is a good time to buy and hold the stock over the long term.
I believe people are willing to forgive and forget, and in time, after this mistake is well behind it, CrowdStrike's technology can bring in customers the way it did before the infamous July 19 incident.
