In Wake of Incident, Crowdstrike's Stock Drops Further

CrowdStrike Holdings Inc. saw its shares extend their declines on Monday as the impact of a faulty software update continued to disrupt global technology operations. The company's cybersecurity stock faced further downgrades from at least two analysts due to the ongoing issues.

‍

John DiFucci of Guggenheim downgraded CrowdStrike's stock from buy to neutral, noting the potential negative effects on the company's business due to the widespread disruption caused by the software issue. In a note titled "Need Time to Let the Dust Settle," DiFucci wrote that the company's reputation could take a hit, affecting new business signings in the near term. He added that while the immediate impact on renewals might be minimal, there could be delays in securing new deals, especially those that are closely contested.

‍

CrowdStrike's stock, which fell 12.22% on Friday, continued its decline with a further 9% drop on Monday morning. This decline came as the market continued to react to the fallout from the incident, which included flight cancellations by Delta Air Lines Inc. carrying into Monday.

‍

BTIG's Gray Powell also downgraded CrowdStrike to neutral, expressing concerns that the outage could impact new customer wins and cause deal delays. Powell, who consulted with five senior security executives post-incident, received more negative feedback than expected. He noted that while the issue was not a security incident, it nonetheless breached a cardinal rule for any security vendor by negatively impacting customers' revenue generation.

‍

Powell warned that current customers might seek larger discounts on renewals and demand credits to compensate for lost business. He emphasized that the reputational damage from the incident could make it harder for CrowdStrike to compete for new deals in the short term.

‍

DiFucci highlighted that even before the incident, he saw risks to CrowdStrike's January-quarter consensus expectations, particularly regarding annual recurring revenue. He also pointed out that despite the 11% selloff on Friday, CrowdStrike's stock remained the most expensive within his software coverage based on enterprise value to recurring revenue.

‍

Despite the current challenges, DiFucci expressed confidence in CrowdStrike's leadership team, believing the company could emerge stronger from this incident. However, he cautioned that it was difficult to recommend buying CrowdStrike's stock at this moment, suggesting that investors with a multi-year horizon might be able to ride out the current volatility.

‍

Some analysts late last week had suggested that investors buy the stock during this period of weakness, viewing it as a potential one-time discount sale.

‍

CrowdStrike, in a tweet on Sunday, emphasized its commitment to restoring all affected systems as quickly as possible. The company noted that of the approximately 8.5 million Windows devices impacted, a significant number were back online and operational.

‍

The incident has broader implications for the software industry, raising questions about the potential risks associated with consumption-based software companies like Snowflake Inc. and Datadog Inc., which experienced business disruptions on Friday. DiFucci also speculated whether the incident might prompt companies and investors to reconsider the risks associated with artificial intelligence.

‍

DiFucci pondered the implications of an AI model making a mistake with far-reaching consequences, suggesting that the CrowdStrike incident could make businesses and investors more cautious about relying heavily on AI technologies.

‍

CrowdStrike Holdings Inc. is grappling with significant reputational and operational challenges following a faulty software update that disrupted global technology systems. The company's stock has faced notable downgrades from analysts, reflecting concerns about its near-term business prospects and competitive positioning. While some analysts see potential long-term value in the stock, the immediate outlook remains uncertain as CrowdStrike works to restore its systems and reputation.

‍