CrowdStrike vs Super Micro Computer

Buying a stock based on bad news may seem like a pretty bad idea at first. Why would you want to pick up shares of a company facing a stumbling block?

It is important to consider the news carefully. If a particular company has navigated rough waters but has a solid long-term story, it could be a fantastic time to buy. That’s because you’ll be getting into this potential long-term winner at a better price.

Two tech companies are in this situation right now CrowdStrike (NASDAQ: CRWD) and Super Micro Computer (NASDAQ: SMCI). CrowdStrike, following a botched software update in July, was involved in the world’s largest information technology outage. As for Supermicro, a few weeks ago a short seller released a report alleging problems at the company.

Let’s take a closer look at each of these players and find out which one makes the best buy after their recent declines.

The case for CrowdStrike

CrowdStrike is a leader in the world of cyber security. That leadership is part of the reason the outage had such an enormous impact — because so many companies and organizations rely on CrowdStrike’s platform. The event halted operations at hospitals, airports and many businesses. Although CrowdStrike released a fix in about an hour, some customers suffered the impact for weeks.

But there is some good news here. First, the issue was not related to a security threat and did not call into question CrowdStrike’s ability to do its job. Second, the company moved quickly to issue the fix.

In its recent earnings report, the company detailed the steps it has already taken to prevent such an event in the future. Additionally, CrowdStrike says most customers have stuck with the company — and the deal pipeline remains intact.

Here’s a little more detail on why CrowdStrike is such a leader. The company sells an artificial intelligence (AI)-powered platform called Falcon, a single lightweight element that gathers data from the customer and beyond to detect potential threats. CrowdStrike offers 28 modules that easily attach to Falcon, and customers can choose from them based on their needs.

This model helped the company’s earnings grow. Annual recurring revenue rose 32% last quarter to $3.8 billion, GAAP net income grew more than five times year-over-year, and operating cash flow and free cash flow hit records.

There’s reason to be optimistic that IT disruption, while difficult, won’t change this solid long-term story.

Case for Supermicro

Supermicro’s stock has climbed steadily over the past few years and even outperformed the stock market darling Nvidia in the first half of the year as it gained 188%. That’s because the equipment maker has seen earnings explode more, thanks to its sales to AI customers building their data centers. Supermicro offers everything from servers to full rack-scale solutions.

The story continues

In fact, the company’s stock performance was so strong that it announced a stock split to lower its price per share and make it more accessible to a wider range of investors. That will happen on October 1st.

But a brief recent report weighed heavily on this top tech player. Hindenburg Research issued a report alleging various problems at Supermicro, including “accounting red flags” and “export control failures”. Unfortunately, this coincided with a delay by Supermicro in filing its annual 10-K report. As a result, the stock has fallen more than 20% since the end of August.

It’s important to note that Hindenburg has a bias toward Supermicro because the firm is short the stock — so Hindenburg benefits if Supermicro’s stock falls. Supermicro says the Hindenburg report contains “false or inaccurate statements.” As for the late 10-K filing, the company says it doesn’t anticipate any major changes to its fourth-quarter or full-year results.

I don’t expect these issues to change Supermicro’s long-term story. The company has grown five times faster than its industry in recent quarters, thanks in part to working closely with top designers to be able to immediately integrate their innovations into its equipment. The growth of the AI ​​market should help Supermicro maintain this momentum.

CrowdStrike or Supermicro?

Both companies should be able to weather these difficult times and succeed and represent excellent long-term buys. They’ve seen their prices drop, and that’s led to valuation drops — so they’re better bargains than they were a few months ago.

That said, CrowdStrike’s valuation, while reasonable, isn’t exactly in bargain territory right now — but Supermicro’s is. Supermicro trades for only about 12x forward earnings estimates, while CrowdStrike trades for 68x. That’s why Supermicro is the best bad news buy right now for an investor who can tolerate some risk.

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Adria Cimino has no position in any of the mentioned actions. The Motley Fool has positions in and recommends CrowdStrike and Nvidia. The Motley Fool has a disclosure policy.

Better Bad-News Buy: CrowdStrike vs. Super Micro Computer was originally published by The Motley Fool