When I last covered CrowdStrike (NASDAQ: CRWD) on 22 July – shortly after the cybersecurity company caused a major global IT outage – I said I was going to hold off on buying the growth stock as it was too much of a gamble. That was the right move in hindsight. Since then, the share price has fallen another 20%.
What about now though? With the cybersecurity stock currently around 42% off its highs, is it time to pull the trigger and buy it for my portfolio?
$10bn damage?
Several weeks on from the infamous IT outage, it’s now possible to see the scale of the event. And it doesn’t look good for CrowdStrike.
The software crash hit airlines, banks, hospitals, payments systems, investment platforms, and many other types of companies, causing an enormous amount of disruption. According to some experts, it may cost businesses more than $10bn in total.
Now, in my last article on CrowdStrike, I said I didn’t think the cybersecurity company would be held liable. That’s because its contract terms usually limit liability in this kind of event to fees paid (ie it would only have to provide a refund to customers).
However, I may have been wrong here. Recently, it has come to light that Delta Airlines – which had to cancel more than 6,000 flights as a result of the outage – has hired top lawyers and plans to seek compensation from the tech company. This adds some uncertainty.
Revenue growth uncertainty
Even if CrowdStrike manages to fend off lawsuits from Delta Airlines and other businesses, I think there are going to be major repercussions for the company in the near term.
I wouldn’t be surprised if existing customers try to negotiate lower fees going forward (a survey by Evercore ISI found that many clients are considering slowing or pausing spending on CrowdStrike and expecting pricing concessions). I also wouldn’t be surprised to see some customers move to other vendors such as SentinelOne and Palo Alto Networks.
This kind of customer activity could slow revenue growth.
The problem is that even after a 40% share price fall, CrowdStrike’s still priced for very strong growth. Currently, its price-to-sales ratio’s 17 and its price-to-earnings (P/E) ratio’s about 60.
So there’s not a lot of room for a slowdown. Ultimately, strong revenue growth (the company has grown its top line by 250% over the last three years) is the main investment thesis here as profits are still quite small.
Should I buy CrowdStrike stock now?
Given the uncertainty related to the reputational damage and the high valuation, I’m not ready to buy the stock yet.
I’m still keen to invest in the company at some stage. After all, it’s one of the leaders in the cybersecurity industry and this industry looks set for huge growth over the next decade. In the long run, I’ve no doubt the tech company will overcome this setback.
But right now, I’m happy to wait until things settle down a bit. I don’t think we’ve heard the end of the IT outage story.
Until there’s a bit more clarity in relation to lawsuits and liabilities, I think there are better growth stocks to buy for my portfolio.
