There could be a lot more bad news to come for CrowdStrike

CrowdStrike (CRWD 0.16%) has been in the news for all the wrong reasons lately. Last month, the cybersecurity company released an update that led to massive outages that affected businesses around the world.

What started as a strong year for the company quickly turned into a disastrous one. Before the outage, CrowdStrike shares were up more than 50% year-to-date. Now, they are down 5%.

Despite the recent selloff, investors should not assume the worst is over.

Bills and legal costs could pile up for CrowdStrike

One of the biggest effects of the disruption was on airlines. Delta Air Lines canceled thousands of flights over several days, costing its business an estimated $500 million. The airline is now threatening legal action against CrowdStrike. Meanwhile, CrowdStrike’s legal team claims the cybersecurity company offered to help Delta during the outage, but the airline ignored the offer.

CrowdStrike boasts many of the world’s top companies as clients, meaning Delta won’t be the only company seeking damages as a result of the outage. US Fortune 500 companies (excl Microsoft) could see their financial losses exceed $5.4 billion due to the outage, according to estimates from insurance company Parametrix. CrowdStrike may soon face a number of lawsuits related to the event.

Could CrowdStrike’s Bottom Line Be Back In The Red?

CrowdStrike’s business has grown significantly in recent years (its top line has tripled since 2021) and has become consistently profitable. Net profit margins still aren’t terribly high; in the last 12 months, it made a profit of $131.7 million on revenue of $3.3 billion. But things moved in the right direction.

If the company is forced to devote significant resources to fighting the legal battles, that could be enough to push the company’s bottom line back into the red. Additionally, the company will likely need to invest more in its operations to ensure adequate safeguards are in place to avoid another disruption in the future. In addition, there is a possibility that CrowdStrike may lose customers due to these developments, so it may need to increase its sales and marketing expenses. All of these factors increase the likelihood that CrowdStrike will struggle to turn a profit in the coming quarters.

Investors may be better off avoiding CrowdStrike stock

Despite the sharp drop in value in recent weeks, CrowdStrike stock has still risen more than 160% over the past five years. Even now, it trades at 18 times earnings and 23 times book value. This is still a very expensive stock to own.

Expensive stocks are fine to own if their businesses are generating strong numbers on their top and bottom lines. That may no longer be the case for CrowdStrike.

There are better tech stocks that investors can buy right now. While it might be tempting to capitalize on recent sales, CrowdStrike is not a business, and things can get worse before they get better for the company.