By Ben Levisohn
Sometimes, a company is so much better than its competitors, that it becomes unassailable. Every quarter, every year, they consistently deliver the goods.
Until they don't.
That happened twice recently, first to CrowdStrike Holdings and then to Delta Air Lines. The events weren't unconnected. CrowdStrike's software update took down a good portion of the internet starting on Friday, July 19, and it took until the following Friday to get 97% of the problem resolved. CrowdStrike's problem was also Delta's problem -- the outages forced the airline to cancel some 6,700 flights, as it proved incapable of responding as quickly as its peers. CrowdStrike stock has fallen 34% this month, while Delta has declined 8.4%.
Otherwise, the two companies have little in common. CrowdStrike is a fast-growing cybersecurity company, one that traded at a nosebleed valuation of 78 times 12-month forward earnings on July 18. Delta, on the other hand, operates in a highly competitive industry with a history of losing money. Its stock has a price/earnings ratio in the single digits.
Despite their differences, both companies are considered the best at what they do. CrowdStrike stock was up 54% this year through its high on July 1, beating the iShares Expanded Tech-Software Sector exchange-traded fund's 7.7% and the Nasdaq Composite's 19% gain. After the initial drop, Mizuho Securities' Jordan Klein called CrowdStrike "best-in-class in terms of end-point security, fantastic reputation for execution, great cash flow margins and overall one of the best growth profiles across security" and "one of the most owned stocks in all software (and there are not many owned stocks in software right now)."
As for Delta, even before the pandemic, it had a reputation for being better run, having a better mileage program, and, more to the point, a better stock than its peers. It even has investment-grade credit ratings from Fitch Ratings and Moody's Investors Service, the only airline to have two. While its stock had lost an annualized 6.4% over the past five years, it's beaten the U.S. Global Jets ETF's 10.4% decline by four percentage points annually.
It's difficult to make those cases for the two stocks now. For CrowdStrike, pushing through an update that causes your customers' Windows computers to crash leaves an opening for Palo Alto Networks and SentinelOne, among other competitors, to offer their services. Some customers are likely to accept. Delta, meanwhile, was still canceling flights long after other airlines were back in the air, reminding investors of Southwest Airlines' Christmas meltdown in 2022. The Transportation Department is now investigating.
Such incidents don't have to be fatal. Chipotle Mexican Grill weathered an E. coli outbreak that sank its stock in 2015, though shares took almost four years to recover from the losses. But it will take time to work out whether recent events are hiccups or something more serious.
In a report released after CrowdStrike's outages, UBS analyst Roger Boyd put his Buy rating on the stock under review, acknowledging that it's "hard to assess a competitive shift this close to the incident." The problem isn't just a financial one -- though the cost is likely to be high. It is also reputational, he writes, with "the incident already having a significant impact on the company's brand and likely to have an impact on the company's go-to-market efforts."
Delta's task may be more difficult. Investors know that airlines have rarely been good investments, even during the best of times. Delta was the one stock that had the potential to change that perception, but now it has to deal with both the financial hit -- some $350 million of operating profit in the third quarter, according to estimates from Melius analyst Conor Cunningham -- and the reputational one. "Until there is further clarity on the impact, the stock is likely to have a legitimate overhang," Cunningham writes. "Once more is known and Delta communicates remedies, investors will eventually gravitate back toward the stock. Even with this hiccup, Delta remains among the best-positioned within the industry." We aren't sure that will be enough.
Of course, it doesn't take a series of unfortunate events for a once-unassailable company to fall on hard times -- just look at General Electric since 2000 or Intel's battle to stay relevant in a world dominated by Nvidia. IBM, once the gold standard in computing, has gained 7.3% annualized over the last 15 years, to the S&P 500's 14%.
And it's those examples that should worry investors, particularly because the S&P 500, with its heaping dose of Apple, Microsoft, and Nvidia, among others, has become the world's single unassailable index. Even with the index down 2.8% over the past two weeks, it's hard to imagine that changing. But as CrowdStrike and Delta found out, something always happens.
Nothing remains unassailable forever.
Write to Ben Levisohn at Ben.Levisohn@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
July 26, 2024 11:28 ET (15:28 GMT)
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