Just a couple of months ago, CrowdStrike (NASDAQ: CRWD) experienced its toughest moment ever. A faulty software update led to the world's biggest information technology outage -- blue screen errors halted operations at companies and organizations worldwide, from airlines to hospitals. Though CrowdStrike issued a fix within an hour, some customers struggled for weeks to resume business as usual. In fact, insurance company Parametrix estimated the outage may have cost Fortune 500 companies $5.4 billion.
Unsurprisingly, CrowdStrike shares tumbled more than 35% in the two weeks that followed the July 19 incident. Since, though, the stock has regained some terrain, climbing almost 30% since its low on Aug. 2. The cybersecurity giant provided customers and investors updates on the impact of the outage during its earnings report in late August and during its Fal.Con conference in Las Vegas earlier this month. Let's take a look at some of the details and find out whether the stock is a buy right now.
Image source: Getty Images.
CrowdStrike's Falcon
First, a quick summary of CrowdStrike's business. The company offers customers an artificial intelligence (AI) powered cloud-based security platform, Falcon, that gathers data from across a company and beyond to detect potential threats. Falcon is a single, lightweight agent but it can handle any security need thanks to 28 optional modules that attach to it -- they specialize in a wide variety of areas such as identity protection or cloud security, for example.
CrowdStrike has seen its revenue soar in recent years as customers appreciate the company's ability to handle all of their cybersecurity needs -- and through a convenient software-as-a-service model . The stock price has followed, gaining more than 380% over the past five years.
Now, a look at how CrowdStike has fared since the July outage. The event happened about two weeks prior to the end of the reporting period, so it put the brakes on the signing of new contracts and shifted CrowdStrike's attention away from deals and marketing and toward working with customers affected by the outage. As a result, more than $60 million in deals expected to close in the quarter were delayed -- but the good news is CrowdStrike expects them to close in future quarters.
In fact, CrowdStrike said most of the pre-incident deals remain in the pipeline, it's won major deals post-incident -- such as an eight-figure one with an enterprise software company -- and most customers have shown themselves to be supportive of CrowdStrike and intend to stick with the cybersecurity giant.
Record cash flow
The company also managed to deliver solid second-quarter results, with annual recurring revenue (ARR) climbing more than 30% to $3.8 billion and operating cash flow and free cash flow reaching record levels. And the company has maintained its goal to reach $10 billion in ARR by fiscal 2031.
Still, it's important to remember that the impact of the July outage isn't over. The company expects its "customer commitment packages" -- incentives offered to customers as some compensation -- will affect new ARR and subscription revenue by about $60 million at the end of this year. CrowdStrike faces other headwinds that weigh on visibility for the later part of the year too. For example, the company expects it will take longer to sign contracts, with "additional scrutiny" sometimes requiring approvals at the chief executive or board of directors level.
The company also could face legal challenges from certain customers because of the outage -- Delta Air Lines has spoken of potential legal action -- though clauses in CrowdStrike's contracts could limit its liability and the company's insurance policies may further lower any expenses linked to the outage.
The importance of Falcon Flex
So, it's fair to say that, yes, the outage is weighing on CrowdStrike and could continue to do so -- but it hasn't halted growth. On top of this, CrowdStrike is applying its "Falcon Flex" program, which requires customers to commit to Falcon but allows them to pick and choose modules as needed throughout the contract, to its customer commitment packages. This means, as part of Flex, CrowdStrike can offer customers extra benefits to compensate for the outage -- and at the same time, these customers will discover Flex and may end up spending more over time.
Now, let's get back to our question: Is CrowdStrike a buy? A look at valuation shows that CrowdStrike is cheaper than it was earlier this year -- it's trading for 77x forward earnings estimates versus more than 100x prior to the July outage. But even at these levels, it's not the cheapest growth stock on the block. For example, AI chipmaker Nvidia and e-commerce giant Amazon each trade for about 40x forward earnings estimates.
That said, CrowdStrike has a solid earnings track record, and after a significant negative event, the company has continued to maintain growth -- and keep customers on board and even ink new deals. Headwinds aren't over, but the long-term view remains bright. And that means growth investors looking for a stock to buy and hold should consider this cybersecurity giant.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Adria Cimino has positions in Amazon. The Motley Fool has positions in and recommends Amazon, CrowdStrike, and Nvidia. The Motley Fool recommends Delta Air Lines. The Motley Fool has a disclosure policy .
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