CrowdStrike (NASDAQ: CRWD) has faced a volatile week, with its stock plummeting 27.1% in just seven days. This sharp decline might have some investors questioning their positions, but for those willing to look beyond the short-term turbulence, I believe the S&P 500 firm remains a compelling investment opportunity in the cybersecurity space.
A wild week
The recent downturn was triggered by a major IT outage on 19 July 2024 that affected millions of users worldwide. Crowdstrike President Michael Sentonas publicly apologised for the disruption, explaining that a planned update had exposed a logic flaw, resulting in the infamous ‘blue screen of death’ for many Microsoft users.
While this incident is undoubtedly a setback, it’s crucial to view it in the broader context of the firm’s overall performance. Despite the recent tumble, the shares are still up an impressive 78.1% over the past year, significantly outperforming both the broader software industry and the US market.
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So what sets the business apart in the cybersecurity field? For starters, I see some robust financial health and growth potential. Analysts forecast earnings growth of 34.64% per year, a testament to a strong market position and expanding customer base. The company also achieved profitability this year, a significant milestone in growth-focused tech.
It’s worth noting that the firm’s market capitalisation stands at a robust US$64.2bn, reflecting investor confidence in its long-term prospects. The price-to-sales ratio of 19.9 times, while high, is not uncommon for high-growth tech companies, especially those in the cybersecurity sector.
What interests me most, however, is that even after an impressive rally, the shares are still potentially undervalued by as much as 42%, according to a discounted cash flow (DCF) calculation.
Growing capabilities
The innovative cloud-native platform, Falcon, continues to set the standard for endpoint security. As cyber threats evolve and become more sophisticated, the demand for advanced security solutions is only likely to increase. Management’s focus on leveraging artificial intelligence and machine learning to detect and respond to threats positions it well to capitalise on this growing market.
The recent outage, while serious, also demonstrates a commitment to transparency and customer service. The swift response and willingness to take responsibility for the issue speak volumes about its corporate culture and values. Sentonas’ acknowledged the possibility of compensation discussions, showing readiness to address the fallout directly.
Risks
Of course, many potential risks remain. The cybersecurity landscape is highly competitive, and management will need to continue innovating to maintain its edge. The sector is also known for its volatility, with an average weekly movement of 8%. I suspect there may also be lengthy legal and financial repercussions from the recent outage.
One for the future
However, for long-term investors, the current dip in the shares could present an attractive opportunity. With its strong growth trajectory, innovative technology, and crucial role in an increasingly digital world, it remains a compelling investment option in the S&P 500.
The company’s ability to bounce back from this setback and continue its growth trajectory will be crucial to watch in the coming months. With cyber threats becoming increasingly sophisticated and prevalent, CrowdStrike’s role in safeguarding digital assets is more critical than ever. I’ll be starting a position at the next opportunity.
