July was a pretty bad month for CrowdStrike (NASDAQ: CRWD) investors. The cybersecurity company has found itself in both a product-oriented and public relations disaster following an identified bug in a recent software update. The glitch has affected tens of thousands of customers around the world, and induced widespread panic selling among investors.
In the month of July, shares of CrowdStrike plummeted by 44% -- wiping out nearly $30 billion in market cap. Could this be a lucrative opportunity to buy the dip in CrowdStrike stock, or is the worst yet to come?
Maybe CrowdStrike needed this
According to reports from its first quarter for fiscal year 2025 (ended April 30), CrowdStrike increased its annual recurring revenue (ARR) by 33% year over year to $3.65 billion. Moreover, after years of burning cash, the company is now consistently profitable -- earning $132 million of net income over the last 12 months.
Overall, this level of revenue acceleration, combined with consistent and rising profitability, makes CrowdStrike a strong operation.
However, a close analysis of the company's valuation may suggest that the current sell-off in the stock isn't such a bad thing. Before news of the software outage broke, CrowdStrike's market cap hovered at around $95 billion. That's pretty rich for a company generating about $3 billion in sales.
CRWD PE Ratio data by YCharts.
Even after a steep decline in share price back in May, followed with the more recent precipitous sell-off, CrowdStrike still trades at a price-to-earnings (P/E) ratio of 437.
Investors have bought CrowdStrike stock more quickly than the company's profits are rising, causing the value of the business to balloon. There is a legitimate case to be made that CrowdStrike is still pricey even after the sell-off in July.
Nevertheless, taking a look at a similar event in recent history could suggest that the current compression in valuation multiples might indicate that now is a good buying opportunity -- and this might be as normalized a price as you'll see.
Image source: Getty Images.
A trip down memory lane
One of the more notable cyberattacks in recent history occurred in 2017, when consumer credit agency Equifax was hacked, affecting over 160 million private records.
EFX data by YCharts.
Following news of the data breach in late 2017, shares of Equifax declined roughly 37%. However, Equifax stock rebounded throughout much of 2018 and reached levels comparable to those prior to the split.
Unfortunately, by the end of 2018, shares of Equifax were back to prior lows following less-than-stellar earnings and a lingering hangover in reputational damages.
Where will CrowdStrike stock be in one year?
There are a couple of important ideas to digest, given the information explored above.
In the case of Equifax, the stock price experienced a volatile journey for about a year following its data breach. On the one hand, shares started to rebound for most of 2018 as investors started to think that the worst news was in the rearview mirror. But the sharp decline toward the end of 2018 demonstrates that reputational damage can take quite some time to overcome, and even the slightest sign of a hiccup in the business can induce fear and doubt among investors.
This could indicate a similar road to recovery for CrowdStrike. Since the company operates at the intersection of artificial intelligence (AI) and cybersecurity, its market potential remains enormous . In other words, the total addressable market variable doesn't change here.
The thing that likely will change is CrowdStrike's ability to penetrate the market, as its tainted reputation may make customers think twice before buying its products.
I think that expectations are now so low for CrowdStrike that if the company indicates even the slightest bit of a turnaround, the stock could witness a jump. However, as seen in the case of Equifax, these gains can be fleeting and the share price could easily be the same in one year as it is today.
The bigger takeaway when it comes to Equifax is that shares eventually recovered, but over a longer time horizon. Today, Equifax trades for $280 per share -- indicating a 211% increase from its low point of $90 in 2018.
Considering there are strong secular tailwinds fueling both AI and cybersecurity, I think CrowdStrike's best days are still ahead. While this turnaround could take years to complete, I think it's shortsighted to label CrowdStrike as a falling knife .
Despite its lofty valuation, I think now is a good time to consider buying CrowdStrike stock at a more normalized level compared to prior periods and preparing to hold for the long run.
Adam Spatacco has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends CrowdStrike. The Motley Fool has a disclosure policy .
Most Popular
Comments / 0