It’s only been a few weeks since CrowdStrike (NASDAQ:CRWD) became a member of the S&P 500, yet shares are down by double-digits today. The cybersecurity platform has found itself at the centre of a global IT crisis, causing the US stock to crash by 19% in pre-market trading.
What exactly is going on? And has this just created a buying opportunity for long-term investors?
Why CrowdStrike stock is down
When working correctly, CrowdStrike’s Falcon platform provides businesses with an AI-powered cyber defence solution. It’s proven to be remarkably powerful, with the company achieving impressive results at a time when many of its peers, such as Palo Alto Networks, have been struggling.
It’s a system relied upon by countless companies, making the business a critical player in modern IT infrastructure. However, it seems that’s also created a weak spot, culminating in a global IT outage that’s impacted banks, airports, media outlets, and even the NHS.
The situation is still developing. But at the time of writing, it appears that an update to the Falcon platform released Friday morning (19 July) caused cloud-connected Windows devices to crash. And that includes data centres, which ultimately supply the bandwidth to the internet worldwide.
Companies like Sky, the BBC, Tesco, and the London Stock Exchange appear to have been affected. With that in mind, it’s hardly surprising to see CrowdStrike’s stock collapse today.
Did a buying opportunity just emerge?
Over the last five years, CrowdStrike has been an exceptional investment. The stock is up by over 300% over this period, ultimately landing it inside of the S&P 500 index. And even in its latest quarterly results, the firm continued to exceed expectations, with revenue up by 33% and free cash flow surging by 42%.
However, with all this momentum the valuation has gotten quite rich. At an $83bn market capitalisation, the firm’s free cash flow yield (FCFY) sits at 0.8%. As a quick crash course, the smaller the FCFY, the higher the premium on a valuation. By comparison, the average for the S&P 500 is around 4%, indicating that investors have huge growth expectations for this business. And that opens the door to significant volatility like we’re seeing today.
Even after dropping by double-digits, the stock’s valuation is still pretty lofty. But it’s not completely baseless.
Right now, the company is sitting on an operating margin of just 0.75%. Thin profitability is not unusual for a tech company. But what seems to have got investors excited is management targeting margins as high as 34% in the long run. Assuming this goal is achieved, today’s valuation makes much more sense.
Of course, achieving this milestone is far from guaranteed. And today’s chaos is undoubtedly throwing plenty of spanners in the works. Apart from reputational damage, potential legal action and fines could be heading in the company’s direction.
Having said that, providing CrowdStrike can bounce back, today’s events may only end up being a short-term speed bump. And for investors willing to take on more risk, today’s volatility may be a good opportunity to consider opening a position in this cybersecurity leader. After all, buying when there’s blood on the streets is a proven tactic for superior investment returns.
