Will Crowdstrike Go Bankrupt?

CrowdStrike Holdings (NASDAQ:CRWD) has long been a leader in the cybersecurity industry but a recent global outage has put the company under intense scrutiny and triggered a sharp selloff. The stock fell by more than 10% following the news and fell by a similar amount the following trading day.

Is this just the start of a pronounced downtrend that will lead to bankruptcy or an opportunity for patient investors to buy the dip in the hopes of a rebound?

Crowdstrike Is #1

While Crowdstrike is taking shots from all and sundry at this point in time, and deservedly so for causing consternation globally, whether computer blue screens or airline travel disruptions, it can’t be forgotten that its Falcon platform is widely regarded as one of the most advanced cybersecurity solutions available.

Crowdstrikes uses both artificial intelligence and machine learning to provide real-time threat detection and response, and that combination sets it apart from many competitors and keeps it at the forefront of the industry. 

The recent global outage triggered uproar and raised very serious questions, though, about the reliability of CrowdStrike’s services. In spite of the CEO’s messages that Crowdstrike has taken measures to address the issue and prevent future occurrences, the incident has undoubtedly affected customer trust and is very likely to stymie short-term growth.

A Vote For Crowdstrike

One factor that can’t be overlooked is how well Crowdstrike has delivered on the financials over past years. Without interruption, the company’s revenue has been on a consistent upward trajectory, with a compounded annual growth rate of over 50% in recent years. That’s rarely seen and speaks highly to the business model, product-market fit and customer adoption seen. 

To give a sense of how well the company has been performing, in its latest earnings report, CrowdStrike posted revenues of $786.6 million for Q1 FY2024, a 42% increase year-over-year, and a net income of $22.2 million.

The consistency with which Crowdstrike delivers revenues and earnings means it has historically traded at a high valuation. Even after the selloff, the stock’s price-to-earnings ratio stands at an astonishing 563x, significantly higher than the industry average.

The only way, in fact, the multiple makes much sense at all is if earnings are growing rapidly and, as it turns out, they are forecast to grow at an annual rate of 105% over the next 5 years, at least they had been before this calamity. If true, that’s equivalent to the stock trading at a P/E multiple of just 15x five years from now, by no means expensive.

Or in other words, Crowdstrike is trading at a high PE multiple but a low price-to-earnings ratio relative to future earnings forecasts.

Why Crowdstrike May Thrive

In spite of the short-term hit to its reputation, Crowdstrike may well thrive over the medium to long-term because the cybersecurity market is expected to continue growing at a rapid pace, driven by increasing cyber threats.

According to Market Research Future, the global cybersecurity market is expected to reach $281.74 billion by 2027, representing a CAGR of 14.5% from 2021.

The tailwind of an increasing market size should support Crowdstrike alone but its no cake-walk with Palo Alto Networks, Cisco, and Microsoft all elbowing it to take market share.

Another factor very much in its favor is the historically high customer retention rate. Not only do customers renew but they frequently expand their use of the Falcon platform after initial adoption.

The company’s net retention rate has consistently exceeded 120%, which suggests very strong customer satisfaction and loyalty.

A further checkbox for the firm is that it continues to attract new customers, growing its customer base by 34% year-over-year to over 23,000 by Q1 FY2024.

With all that said, the recent outage has raised concerns about the reliability of CrowdStrike’s services and the full financial and reputational impact of the outage is yet to be seen.

Short-term Hit To Crowdstrike Reputation

The worse-case outcome for Crowdstrike now would be a similar outage occurring soon or worse, a major security breach, which almost undoubtedly would lead a significant loss of customers.

While management has attempted to placate customers, financial stability would be placed in jeopardy if it tripped up twice, especially in a short-time frame.

Even in a worst-case scenario, the company can fall back on a strong financial position with $2.1 billion in cash and equivalents and no long-term debt as of Q1 FY2024. As a result bankruptcy appears unlikely in the near term absent successful class-action lawsuits.

There is also the possibility of scrutiny from regulators in the wake of cybersecurity incidents may very well result in fines, sanctions, or stricter compliance requirements for CrowdStrike. If these come to fruition, regulatory challenges are set to increase operational costs and impact profitability.

On the flipside, the best case outcome is that CrowdStrike successfully addresses the recent outage and continues to innovate and enhance its Falcon platform, thereby reinforcing its market leadership and drive continued customer acquisition and retention.

In a positive scenario, sustained revenue growth and margin expansion lies on the horizon and may well justify its high valuation even after the selloff.

One lever Crowdstrike can pull is to re-brand and may do so via partnerships or even acquisitions. By integrating complementary technologies and services, a more comprehensive cybersecurity solution can be built to serve a broader customer base and simultaneously increase revenue streams.

Will Crowdstrike Go Bankrupt?

It’s unlikely that Crowdstrike will go bankrupt, though a short-term reputation and financial impact is likely following the recent outage.

The company is in a market that is growing at a rapid pace and has a strong history of delivering exceptional financial results. Plus, net income is expected to soar over the coming years and even if the short-term is hindered the medium term is likely still quite rosy.

With that said, management’s ability to confront recent challenges will be crucial to maintaining its market leadership, and capitalize on growth opportunities.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.