The Stock of Crowdstrike is Stemming Its Bleeding, but Even Bulls See Some Risks

Can CrowdStrike Holdings Inc.’s stock break its five-session losing streak, which has resulted in a 30% drop?

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Shares of the cybersecurity technology company fluctuated early Tuesday as analysts continued to assess the impact of a flawed software update that disrupted Windows machines and global IT systems last week. The stock is currently up just over 2%.

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Even optimistic analysts acknowledge potential risks to CrowdStrike’s financials in the upcoming quarters, noting that customers might demand better pricing from the cybersecurity firm.

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For example, Truist Securities analyst Joel Fishbein conducted a rough analysis. Assuming half of the company's business is finalized in the last two weeks of a quarter and 30% of those customers demand pricing concessions from CrowdStrike, this scenario could create a roughly 15% headwind to the company’s net new annual recurring revenue (ARR) for the July quarter.

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Fishbein revised his net new ARR projections, now estimating $191.6 million for the July quarter, down from a previous estimate of $223.8 million. If CrowdStrike meets this new estimate, it would represent a 2.4% year-over-year decline in this metric. Fishbein’s earlier projection was 14% higher than what CrowdStrike reported a year earlier.

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"We recognize this is a severe assumption as we believe switching costs are high, and this incident underscores the importance of diversifying the security stack rather than consolidating both the operating system and security vendor," Fishbein wrote.

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While Fishbein lowered his price target for CrowdStrike shares to $325 from $400, he maintained a buy rating.

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"Long-term, we do not anticipate this incident will affect the fundamental demand for the company since the outage was due to a faulty software update, not a cybersecurity breach. However, in the short term, it could tarnish the company’s image of invincibility and potentially impact results," Fishbein wrote.

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Jefferies analyst Joseph Gallo shared a similar perspective, stating that the incident is expected to have limited to no impact on customer churn, with net new business being most at risk. He also maintains a buy rating on the stock.

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CrowdStrike shares fell 23% in the first two sessions following the outage. They are now up only 5% for the year, after having surged as much as 54% earlier in July.

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As analysts dissect the aftermath of the software glitch, the primary concern revolves around potential pricing pressures from customers. If a significant portion of CrowdStrike's business involves last-minute deals and customers use the incident to negotiate better pricing, the company’s revenue growth could be impacted.

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Despite the immediate challenges, both Fishbein and Gallo emphasize that the long-term outlook for CrowdStrike remains positive. The current issue is linked to a software update error rather than a security breach, which means that the fundamental demand for cybersecurity solutions should remain strong. However, the incident may temporarily affect investor sentiment and customer perceptions.

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The fluctuation in CrowdStrike’s stock price highlights the market's sensitivity to operational disruptions, even when they are not directly related to security breaches. Investors are closely monitoring how the company addresses the software issue and manages customer relations in the aftermath.

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As CrowdStrike works to restore its reputation, the focus will likely be on maintaining robust customer support and ensuring that similar incidents do not recur. The company’s ability to reassure customers and investors of its reliability and effectiveness in cybersecurity will be crucial in navigating through this period of volatility.

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In summary, while CrowdStrike faces near-term challenges due to the software update glitch, the long-term demand for its services is expected to remain strong. Analysts are optimistic about the company's prospects, albeit with some caution regarding short-term financial impacts and potential shifts in customer behavior. The stock's recent performance reflects both the immediate fallout from the incident and the underlying confidence in CrowdStrike’s future growth potential.

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