Two analysts suggested buying CrowdStrike shares on the dip sparked by a software update that caused broad outages
Many analysts thought CrowdStrike’s strong market positioning and importance to customer would mitigate the fallout from a software-update issue that had broad ramifications across industries on Friday.
CrowdStrike Holdings Inc. shares slid to a double-digit percentage decline on Friday, after a software update spurred technical outages that rippled across industries.
And for CrowdStrike, this sort of blunder “could not come at a worse time,” according to Mizuho desk-based analyst Jordan Klein. That’s because the company wraps its fiscal quarter at the end of this month, and software companies tend to finalize deals as the quarter winds down.
That means pressure heading into the July-quarter results — especially since CrowdStrike shares had been up 34% on the year prior to Friday’s selloff and because the stock was a rare favorite in the unloved software sector. When earnings come around, investors likely need to see more than just results that match expectations, Klein wrote: The company needs a beat-and-raise report.
Still, he said he would be a buyer of CrowdStrike shares in light of their weakness. “A situation like this feels manageable in the long run, and the big selloff to me feels like a one-time discount sale…at a Ferrari dealer,” he wrote Friday.
Key for CrowdStrike is that its issue stemmed from a software update, not a hack. Cybersecurity issues are more damaging to brand reputation, though one question here is whether CrowdStrike’s insurance insulates it from financial risk around its customers’ missed sales.
Still, Friday’s selloff shaved more than $9 billion off the company’s market capitalization. Does the outage warrant that?
Klein noted that CrowdStrike has “limited” risk of market-share losses since the company “commands best-in-class endpoint security and customers know it.”
It’s perhaps telling that there wasn’t too much action in major cybersecurity stocks other than CrowdStrike’s on Friday: Palo Alto Networks Inc.’s stock registered a modest 2% gain, while Fortinet Inc.’s was up fractionally.
Mizuho’s Gregg Moskowitz said CrowdStrike’s stock pressure was “understandable” given the stock’s sizable outperformance this year, but he maintained his bullish view.
Based on Moskowitz’s assessment of CrowdStrike’s terms and conditions, he doesn’t think the company will be contractually liable, though he saw the possibility that the company might “offer some pricing concessions to valued customers that were highly impacted.”
He was doubtful that the event would “cause any meaningful lasting damage to CrowdStrike’s business or reputation.”
William Blair’s Jonathan Ho also said he and his team “would be buyers of the stock on weakness.”
“Although an issue such as this failed update may give some organizations pause regarding the selection of a single vendor (or a small number of vendors) as their key cybersecurity vendor, we continue to view the general benefits of vendor consolidation as very positive for organizations, given the overall risk/reward for organizations,” he wrote.
Ho is referring to a growing trend in the cybersecurity market, through which companies are trying to get customers to do more of their business with just one vendor rather than make use of different types of products from different vendors that may not communicate as cleanly between one another.
But Evercore ISI’s Peter Levine was more concerned that sentiment would shift there, as he said his initial conversations with industry players suggested the outage “will alter the platform consolidation narrative.”
“This event clearly proves that cyber needs to be diversified and the idea of relying on one or two vendors will come under scrutiny,” he wrote.
Meanwhile, Barclays noted that the issue could take time to fade from investor consciousness but that the company ultimately seemed positioned to weather it due to its market dominance and critical positioning in customers’ security portfolios.
“We say this because we have seen other large tech conglomerates deal with outages as well,” including Microsoft Corp. and Amazon.com Inc.’s AWS, and because of their dominant competitive position, ultimately the tool remains a key part of the architecture,” Barclays analyst Saket Kalia wrote. “The issue though is this will likely take time to fix, and bounce back from.”