Crowd Trust: CrowdStrike Escapes Material Impact From Global Outage (NASDAQ:CRWD)

Introduction and investment thesis

Actions of CrowdStrike Holdings, Inc. (NASDAQ:CRWD) lost 40% of their value in two and a half weeks after the widely reported global outage affected 8.5 million Windows devices, falling. as one of the most significant cyber security events in history. A day after the news broke, I came to the following conclusion:

“However, after the recent negative headlines came to light, I think the stock could remain in the punishment box for a while. In addition to the negative publicity, I believe CrowdStrike could face negative financial consequences from companies around the world who were forced to suspend operations for hours. Until these issues are resolved and the market gets an accurate update on what to expect, uncertainty will prevail, which is investors’ worst enemy.”

Even though it has become clear that CrowdStrike’s financial liabilities are largely capped by fees paid by their customers, there were some companies that decided to do it file a lawsuit against the company with uncertain consequences. Adding to the possibility of losing customers and slowing new acquisitions, this uncertainty weighed on the stock for a while. The big comeback came on the 5th^th of August, where a significant intraday loss was reversed into a small gain. This return was not exhausted until its publication Earnings from the second quarter of the financial yearwhich could have been seen as a make-or-break release in light of recent events.

Since the incident took place on the 19^th of July and the second quarter ended on the 30th^th from July, the most interesting data points from the Q2 release are Q3 and FY25 guidance and the development of remaining performance obligations. Based on this data, it looks like customers have remained loyal to the company as FY25 revenue guidance has been cut by just 2.4%. Meanwhile, in the bottom line, CrowdStrike expects $123 less in non-GAAP operating income for this fiscal year, primarily resulting from additional costs related to the outage. This equates to only $0.5/share, which is also not a significant amount. I think investors can breathe a sigh of relief, and with that, I’m resetting my original Strong Buy recommendation on the stock.

CrowdStrike maintains customer trust

Most market participants agreed that CrowdStrike’s response to the incident was exceptional, which was confirmed in the current Q2 earnings release. The numbers reported in Q2 were only slightly affected by the outage, as there are only 8 business days left in the post-outage quarter. However, it is worth taking a brief look at them to examine the business momentum that occurred in the incident. Looking at the company’s key growth indicator, Annual Recurring Revenue (ARR), their annual growth continued to stabilize at just over 30% to $3.86 billion:

I think this looks encouraging at first sight as the previous stabilizing trend has continued. Looking at new ARR growth reveals a somewhat softer picture at first glance, showing stagnation compared to the previous quarter at $218 million:

However, it’s important to note that when considering seasonal trends, net new ARR tends to increase only slightly from Q1 to Q2, so it would be too early to draw any broad conclusions from this. Although we have to admit that last year’s growth rate dropped from 22% to 11%, which is something to keep in mind for the future.

Looking at customer engagements, we could have seen continued growth throughout the quarter, meaning customers did not pull significant future business from CrowdStrike immediately after the outage. Remaining performance obligations came to ~4.9 billion based on additional company financial information, which is largely in line with seasonal trends:

This is also a good sign that top-line growth prospects have remained strong.

However, the most influential data point from the Q2 release was the guidance for Q3 and FY25, in my opinion, as it already incorporates CrowdStrike’s most up-to-date insight into the incident’s impact on fundamentals.

The most important data points that the company targets in this regard are total revenue and operating income:

In its Q1 earnings release, CrowdStrike guided for total revenue of $3.993 billion for FY25, which was down just 2.4% to $3.896 billion in Q2. I believe this indicates that the company is not counting on losing significant current or future business, and this could also be due to the impact of sales reps having to deal with the disruption instead of generating new business.

Looking at operating income, the picture is not so rosy at first glance, as the previous guidance of $903 million was cut by 13.6% to $780 million. I think most of this will just be a one-time additional cost to compensate customers and the additional costs incurred in handling the incident. CrowdStrike has 242 million shares outstanding, so these additional costs are $0.5/share. Given that at the time of writing, the stock price is still ~$70 below the pre-incident close, I think these costs can also be considered insignificant.

Based on the above, I believe CrowdStrike will continue to perform as a Rule of 60 (annualized revenue growth rate + FCF margin) company in the coming quarters, which is still quite unique in the SaaS space. Comparing the company’s current valuation to other top SaaS companies, we can see that the significant valuation gap has narrowed based on forward Price/Sales multiples, although there doesn’t appear to have been such a significant deterioration in fundamentals:

Both Datadog ( DDOG ) and ServiceNow ( NOW ) are leaders in their respective businesses, with a projected Rule of 55 and Rule of 53 for this year, respectively. Currently, it looks like CrowdStrike will be able to maintain their 60 meter rule, which deserves a higher valuation premium in my opinion.

This shows that in light of the reassuring news that the global outage did not derail CrowdStrike Holdings, Inc. from its upward trajectory, there could be additional upside for the stock. While there are still some risks lingering around the incident, I think the current risk/reward setup provides a good entry point for stocks.