Why CrowdStrike (CRWD) stock is rising today

What happened:

Shares of cybersecurity firm CrowdStrike ( NASDAQ:CRWD ) rose 5.9% in the morning session as markets bounced back from an initially muted response to the Fed’s interest rate cut, which sparked renewed appetite for the asset of risk. While investors expected a rate cut from the US central bank, there was little discussion as to whether the cut would be 25 bps (a quarter of a percent) or 50 basis points (half a percent).

The Fed ended up cutting its policy rate by 50bps (0.5%) to 4.75%-5.00%. This marks the first rate cut in about four years. As a reminder, the Fed — under Chairman Jerome Powell — began raising rates to combat inflation resulting from the COVID-19 pandemic when a confluence of supply chain disruptions, labor shortages and stimulus spending caused inflation to soar. hot

Looking ahead, the Fed has signaled that more tapering is possible in 2024/25. Putting it all together, the announcement and outlook provided a breath of fresh air and a clearer picture of the Fed’s monetary policy direction, which the market has been waiting with bated breath. If there’s one thing the market doesn’t like, it’s uncertainty.

The driver of a stock’s value is the sum of future cash flows discounted to the present. The result of lower interest rates, all else equal, is higher stock valuations. This is especially true for higher growth stocks, such as those in the technology sector, where present value is more dependent on cash flows many years into the future.

To recall, a software update to the company’s Falcon platform was blamed behind a global outage in July 2024 that canceled flights, wiped out hospital appointments and prevented TV broadcasters from talking about the outage. Shares fell sharply after that, as the market debated whether the botched update and insurance outage would cause irreparable damage to the company and its brand. So far, the damage appears to have been limited. Still, the market is trying to figure out the right price for this asset, which is a leader in its space, growing fast and profitable, but not immune to hiccups.

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What the market tells us:

CrowdStrike stock is highly volatile and has had 14 moves of more than 5% in the past year. Against that background, today’s move indicates that the market sees this news as significant, but not something that would fundamentally change its perception of the business.

The previous big move I wrote about was 21 days ago, when the stock gained 5.8% on news that the company reported second-quarter earnings results. The quarter itself was solid with ARR (annual recurring revenue), revenue and operating profit. As the stock plunged from nearly $380 in mid-July to $265 due to massive disruption from a botched CrowdStrike Falcon update on Windows machines that wreaked havoc on airlines, hospitals and other important parts of the global economy , the market feared that the numbers could look pretty bad in the near term. Interestingly, the company provided positive updates. These include: 1) Multiple large deals (7, 8 and even a 9-figure deal) closed after the incident; 2) Gross retention rates over the last 5 weeks year-over-year; and 3) CNAPP (Cloud-Native Application Protection Platform), SIEM (Security Information and Event Management), and identity modules collectively exceeded $1 billion in ARR.

The story continues

Going forward, guidance was disappointing, however, as full-year revenue was cut and revenue guidance for the next quarter missed Wall Street estimates. However, this seems “better than feared”. These results demonstrate that while there are headwinds from the disruption, the headwinds aren’t that bad (for now).

CrowdStrike is up 14.8% year-to-date, but at $283.82 a share, it still trades 27.6% below its 52-week high of $392.15 from June 2024. Investors who have bought $1,000 worth of CrowdStrike stock 5 years ago would look like an investment worth $4,119.

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