1 Artificial Intelligence (AI) Growth Stock Down 25% to Buy Now

State-of-the-art cyber security specialist CrowdStrikehis (CRWD 8.10%) the stock infamously fell from highs earlier this summer after a software update snafu crashed millions of Microsoft– computer systems connected worldwide. It was a bad image for the company and raised concerns about losing customers to hungry competitors.

It’s been a few months since the outage, and CrowdStrike’s first earnings report from the event gave little indication that the sky is falling.

The Federal Reserve has begun cutting the rate it charges banks for overnight loans, potentially leading to interest rate cuts that could invite higher valuations for growth stocks like CrowdStrike. If you haven’t already, now is an opportunity to consider adding this high-flying AI stock to your portfolio while it’s trading at a discount to 52-week highs.

Here’s what you need to know.

The basic product remains intact

There’s no point in sugarcoating it: the CrowdStrike incident was a disaster. The good news is that it was an update error, not a fatal flaw with the company’s technology or product.

Its platform is not like the antivirus software of a decade ago; the cloud-based product creates a network that connects all of a customer’s devices in real time and protects them using various technologies, including artificial intelligence (AI).

CrowdStrike has received strong industry recognition as a leader in endpoint detection and response and has evolved into a diversified security platform that sells its protections as product modules. The company’s tremendous growth is related to attracting new customers and cross-selling.

Today, 65% of its customers use at least five of its modules. Big dollars are being collected; 48% of customers spending at least $100,000 use at least eight modules.

Cybersecurity companies like CrowdStrike spend a lot on marketing and customer acquisition, but cross-selling has helped CrowdStrike increase profits. The company converts nearly a third of its annual sales into free cash flow. It now has the deep pockets to compete with just about anyone: about $4 billion in cash on its balance sheet and just $743 million in debt.

The financial impact seems minimal so far

Wall Street’s initial fear was that customers would flee CrowdStrike after the outage, but that hasn’t happened, at least not yet.

All eyes were on guidance for 2024, as second-quarter earnings would be too early to see an effect of the disruption. Management lowered its revenue guidance, but only by a small amount. You can see below that analysts’ estimates for this year’s revenue were only down about 2.5%.

CRWD revenue estimates for the current fiscal year; data by YCharts.

It’s worth noting that software sales cycles can take time, and analysts expect headwinds to stretch into 2025. Revenue estimates for next year are down about 5.5%. A noteworthy title is that archrival SentinelOne recently won a settlement with the PC maker Lenovo to include its security software in new devices.

There is no way to know if CrowdStrike was a candidate for this deal. Still, these types of headlines could raise question marks until the company gets more quarters under its belt and demonstrates that its post-disruption growth trajectory remains intact. Revenue guidance over the next few quarters will be crucial.

A fair price for a first class business

The proof is always in the data, and future results could change things. But for now, it looks like CrowdStrike will survive the disruption and remain the best-in-class tech stock. Even the lowered revenue estimates for 2025 equate to a 22% gain next year.

Shares are still 25% off their peak, despite returning to post-break lows. This gives investors some much-needed relief on stock valuation:

CRWD EV to income (forward); data by YCharts. EV = enterprise value.

The question with fast-growing and highly profitable companies like CrowdStrike is always: How expensive is too expensive?

Its stock traded at about 24 times enterprise value (EV) to sales at the time of the break, making it among the most valuable companies on Wall Street. It’s hard to call CrowdStrike cheap when it returns to trading at a considerable premium to its peers, but it’s no longer the most expensive company on the market. It’s comfortably below what companies like Nvidia and Palantir currently go for.

The stock is still expensive enough that market volatility or potential evidence of further disruption damage could send it down again. However, interest rates are now heading lower, which could lift the valuations of growth stocks like CrowdStrike Holdings.

You should consider owning some CrowdStrike stock, but don’t feel obligated to rush out. Consider a dollar cost averaging strategy to keep some cash on hand in case better buying opportunities arise.