Bad press can sink a stock, but that doesn't mean it'll stay down forever. In some cases, buying a stock when it's getting a lot of negative attention can position you for greater returns down the road. As long as the underlying business isn't in bad shape, a sell-off due to some bad press could make for a great buying opportunity.
CrowdStrike Holdings (CRWD +4.33%) could potentially be just such an opportunity. Back in July, it inadvertently triggered what some have described as the largest-ever IT outage, bringing down millions of Windows computers worldwide. That outage, caused by the rollout of a flawed software update, impacted many industries and had wide-ranging impacts on consumers and businesses.
Shares of CrowdStrike went over a cliff after it became clear that the company was to blame. They've bounced back somewhat, but before the outage, they were up by more than 40% in 2024. Today, CrowdStrike's year-to-date gains sit at a much more modest 8%. Could this be a great time for investors to scoop up the tech stock at a discounted price?
NASDAQ: CRWD
Key Data Points
CrowdStrike's business is still growing, but it did adjust its guidance
On Aug. 28, CrowdStrike reported its fiscal second-quarter results, which still looked strong. For the period ending July 31, revenues rose by 32% year over year to $963.9 million, and operating income came in at $13.7 million, which was an improvement from its operating loss of $15.4 million in the prior-year period.
The caveat, however, is that the July 19 outage occurred too close to the end of that fiscal quarter for its fallout to make a meaningful difference to the report. However, there are signs that its business was already feeling the impact, as management adjusted its guidance for the year.
For its fiscal 2025, which ends in January, CrowdStrike projects that revenue will be around $3.9 billion, down from the roughly $4 billion it was projecting a few months earlier. The more notable change was on the bottom line. CrowdStrike now projects its adjusted income will come in between $774.7 million and $783.9 million, down from its earlier guidance range of $890.1 million and $916.5 million.
The big test will come in later quarters as customers decide whether or not to stick with CrowdStrike.
CrowdStrike's stock may be down but it isn't cheap
Although shares of CrowdStrike are down by more than 10% in the past three months, the stock was trading at extremely expensive valuations before the outage; a sell-off may have been overdue. Based on analysts' projections, CrowdStrike is still trading at 76 times its future expected profits. For comparison, rival Palo Alto Networks trades at a forward earnings multiple of 57.
While neither of those multiples is cheap, it could be difficult to justify paying more of a premium for CrowdStrike than for Palo Alto right now. Analysts may also end up reducing their expectations for CrowdStrike's earnings as they learn more about the fallout from the outage. If that happens, the company's already-high forward price-to-earnings multiple would become even more inflated.
Investors are better off taking a wait-and-see approach with CrowdStrike
CrowdStrike's growth rates have been impressive, and if the stock were trading at a friendlier valuation, it might seem like a good investment right now. But as it stands, there's not much margin of safety with the stock. Even if CrowdStrike's business recovers in the long run, investors should demand a discount to compensate for the uncertainty ahead, which is why I would suggest waiting on the sidelines. While the stock may have fallen in value, it's still not worth buying at its current price.
