CrowdStrike stock is under pressure; correction may continue

CrowdStrike’s massive software outage on 19 July 2024 immediately sent its stock down by 14.2%. The decline continued until 5 August, with total losses exceeding 40.0% and the quotes dropping to 200 USD. However, based on investor reaction, such a price made the stock attractive for buying, sparking interest in the company’s shares and helping the stock price recover. This article provides a fundamental analysis of CrowdStrike’s report, assesses the impact of the massive failure on the company, and covers a technical analysis and forecast of CrowdStrike’s shares.

About CrowdStrike Holdings, Inc.

CrowdStrike Holdings, Inc. is a US company involved in cybersecurity. It was founded in 2011 and is known as a provider of cloud-based solutions for protection against cyberattacks, information threats, and Internet intruders. CrowdStrike went public on the NASDAQ on 12 June 2019, and on the first day of trading, its price rose by 70%, reaching 58 USD. The company’s main product is the cloud-based CrowdStrike Falcon platform, which uses artificial intelligence (AI), machine learning, and big data analysis to identify, eliminate, and prevent computer threats in real time.

Main business segments of CrowdStrike Holdings, Inc.

Endpoint security – CrowdStrike Falcon provides security for electronic devices, including computers, servers, and mobile devices. It helps detect and prevent unauthorised intrusions by viruses, ransomware, and other malicious codes.

Incident response and remediation – the company provides services for rapid response to security threats and investigation of cyberattacks. This helps companies deal with the consequences of data leaks or compromise of their computer systems.

Threat intelligence – CrowdStrike offers information analytics and cyber threat data, enabling companies to better understand attack sources, trends, and vulnerabilities of the existing security structures.

Cloud protection – the company’s solutions protect data and infrastructure in the virtual cloud, including AWS, Google Cloud, and Microsoft Azure services.

CrowdStrike Holdings, Inc.’s main revenue streams

Software as a service (SaaS) subscriptions – CrowdStrike’s main revenue stream comes from subscriptions to the CrowdStrike Falcon platform. It allows clients to flexibly use its cloud-based solutions, paying for access based on the number of protected devices or other parameters.

Professional services – in addition to selling software subscriptions, the company earns from consulting, incident investigations, and security audits.

CrowdStrike Holdings, Inc.’s Q2 2024 report

CrowdStrike Holdings, Inc. delivered strong Q2 2024 financial results. Below are the key figures compared to the same period 2023:

• Revenue – 963.9 million USD (+32%)
• Net income – 47.0 million USD (+452%)
• Earnings per share (EPS) – 0.19 USD (+533%)
• Operating margin – 1.54% (+729 basis points)
• Subscription revenue – 918.3 million USD (+33%)
• Professional services revenue – 45.6 million USD (+10%)

The company showed steady growth in revenue, profitability, and subscription revenue from last year, which confirms strong demand for CrowdStrike cybersecurity solutions. The key revenue stream is subscriptions to the company’s services.

CrowdStrike Holdings, Inc.’s 2024 outlook

Following the software incident, CrowdStrike’s management has revised its 2024 revenue outlook downwards. Annual revenue is projected to range between 3.89 and 3.90 billion USD, down from the previous forecast of 3.97-4.00 billion USD. Adjusted EPS is expected to be approximately 3.61-3.65 USD, while the initial forecast suggested 3.88 USD. The company’s management attributes the decline in the figures to a possible negative reaction to the payment of 60 million USD to clients as compensation for the outage.

On the one hand, the company points to potential challenges that may lead to a reduction in revenues. On the other hand, the annual outlook was lowered so insignificantly that the company can easily catch up. This would be the unexpected positive news for market participants and could positively affect the stock price and the future outlook for CrowdStrike shares.

CrowdStrike Falcon software outage

There was a large-scale outage of CrowdStrike software products on 19 July 2024, caused by a faulty update to CrowdStrike Falcon security module, which was designed for Windows-based devices. This led to massive operating system failures, causing the so-called blue screen of death (BSOD) on more than 8.5 million devices worldwide.

The outage affected operations of key infrastructure facilities, including airports, hospitals, banks, and goverment agencies, resulting in significant financial and operational problems. For example, Delta Air Lines (NYSE: DAL) was forced to cancel more than 2,200 flights, incurring losses of about 500 million USD.

The impact of the incident on CrowdStrike Holdings, Inc.

CrowdStrike did not feel the financial impact of the outage in Q2 2024 only because it occurred on 19 July when Q2 was already over. The Q3 2024 report will show how the company’s clients actually reacted. However, even in the worst-case scenario, their number will unlikely decrease significantly.

All this will become known only when the Q3 2024 is over, while investor reaction could be seen on the same day. CrowdStrike stock lost 14.2% at the market open on 19 July and fell by 41.0% by 5 August.

Following the massive outage, CrowdStrike faced lawsuits from its clients, who accused the company of providing false information about the reliability and pre-testing of products going on sale. Delta Air Lines has hired a law firm to seek compensation from CrowdStrike and Microsoft Corporation (NASDAQ: MSFT) as the outage affected devices running the Windows operating system.

Like most major tech companies, CrowdStrike was insured against potential incidents. As a result, insurers will suffer from all the financial implications of the outage. Analysts estimate that the incident may cost them from 300 million to 1.5 billion USD depending on the amount of compensation paid. The damage includes both direct losses from downtime in the work of companies and the litigation costs.

The negative impact of the outage may result in customer churn for CrowdStrike, slashing its revenue. The company has a significant share of the cybersecurity market and stands out from its competitors thanks to its Falcon platform, which was the source of the problems. According to various analyst companies, CrowdStrike’s share of the cybersecurity market was about 17-20% in 2023, making it one of the market leaders but not a dominant one. As a result, clients may take advantage of alternative solutions from companies such as McAfee (NASDAQ: MCFE), Palo Alto Networks (NASDAQ: PANW), SentinelOne Inc (NYSE: S), or Sophos (NASDAQ: SOPH). The current situation may negatively impact CrowdStrike in the long term.

Technical analysis of CrowdStrike Holdings, Inc.

CrowdStrike stock is trading within an ascending channel on the weekly chart. In May 2024, the quotes reached its upper boundary, which involved increased volatility. Both of these factors signalled a potential corrective decline in the price.

The stock price went down sharply in July, driven by that same massive outage. Although the decline was significant, it did not reach the trendline, indicating that the correction could continue. Two scenarios can be considered in this situation:

• An optimistic CrowdStrike stock forecast suggests that the quotes will continue to recover and break above the 290 USD resistance level. In this case, the growth target will be 360 USD. In this scenario, the uptrend will gain momentum, with the shares reaching a new all-time high.
• A negative CrowdStrike stock forecast predicts a further decline to the trendline, which is near the 160 USD support level. Following this, demand for shares could grow, with the quotes remaining within the ascending channel. A rebound from the 160 USD support level may propel the price to 290 USD. This forecast is a priority as of 18 September 2024.

Technical analysis and forecast for CRWD stock

Summary

Since its IPO in 2019, the company reported its first profit only in Q2 2023. The operating margin of 1.54% shows that the company is still teetering on the edge of profitability, making investing in CrowdStrike shares highly risky.

The company does not provide investors with an additional source of income in the form of dividends and does not buy back shares, which could support the stock price. The company uses its free cash to optimise cybersecurity solutions, expand its client base, and continue its aggressive market positioning. It is still in the active development stage at the moment.

The massive outage in July last year will likely have a limited impact on the financial performance of CrowdStrike Holdings, Inc. At the same time, it points to issues with the quality of its services. If the company can remediate these shortcomings, it will likely continue to increase its share of the cybersecurity market. However, if it follows the path of Boeing (NYSE: BA), which has yet to address its product quality issues, investors would be wise to stay away from CrowdStrike stock.