I’ve had CrowdStrike (NASDAQ: CRWD) stock on my watchlist for a while now. I’m keen to get more exposure to the fast-growing cybersecurity industry and this is one company I’m considering investing in. After last week’s global IT outage – which was accidentally caused by CrowdStrike – the share price is down significantly. Should I scramble to buy the shares or wait?
A unique cybersecurity company
Before I look at the ramifications of last week’s IT outage – which have made CrowdStrike a household name – it’s worth explaining why I’ve been looking to buy this tech stock.
Recently, this company has been the clear leader in the global cybersecurity field. Over the last three years, its revenues have grown by around 250% (versus roughly 100% for rivals Palo Alto Networks and Fortinet).
Why has it been doing so well? Because it has a very powerful offering.
You see, a lot of cybersecurity companies mainly focus on firewall protection. CrowdStrike, however, offers continual cloud monitoring and detection services.
A good analogy here is airport security. What many cybersecurity companies do is akin to the security gates we pass through when we arrive at an airport. We need a boarding pass to get through them, but once we’re through no one is really monitoring us (meaning bad actors can potentially misbehave).
With CrowdStrike, however, anyone who passes through the gates is continually monitored. And if unusual/malicious activity is detected, the company can act quickly and isolate it so that it doesn’t spread.
The other major feature of CrowdStrike is that it collects a vast amount of data from its customers and uses it to continuously update its threat detection capabilities. So, there’s a ‘network effect’ going on here – the more customers it has, the more powerful its offering.
The global IT outage
Now, last week’s IT outage was the result of a software update from the company. This sent computer systems all over the world down.
CrowdStrike’s share price had already experienced some weakness in the weeks before this. But this development sent the stock down sharply.
Is this the buying opportunity I’ve been waiting for?
I’m not sure.
The outage hit a lot of major operators including airlines, hospitals, and supermarkets. And the costs are going to be enormous.
I don’t believe that CrowdStrike will be held liable. That’s because its contract terms usually state that in this kind of event, it doesn’t have to shell out more than a simple refund.
But there could be other ramifications here. For example, customers may look to negotiate lower fees going forward. Or governments could introduce new regulations designed to stop the same thing happening again.
The problem is that CrowdStrike has a very lofty valuation right now. Currently, it trades at 19 times forecast FY25 sales and 76 times expected earnings.
At those multiples, there’s very little room for error on the growth front.
My move now
Given the uncertainty and the valuation, I’m going to hold off on buying the stock for now. Until we see how this all plays out, it’s a bit too much of a gamble for me.
I’m still looking at the cybersecurity sector, however. I may invest in Fortinet, which is held by top fund manager Terry Smith. Or I may go with a small UK cybersecurity stock I’ve been doing some research on.
