Is Crowdstrike a Risky Buy or a Golden Opportunity?

Crowdstrike at this moment in time is the epitome of what makes investing challenging. The blackout experienced around the world due to an error in code left the reputation of the cybersecurity firm in tatters.

The company now faces two major hurdles to win back customer confidence. First, it has to win back the confidence of its clients and secondly it has to resolve the liabilities that may follow the global outage.

While the company’s $3.7 billion in cash may seem ample enough at first glance to address any claims that follow, it may not be the deep reserve that it appears to be if class action lawsuits are filed that punish the firm according to the damage it caused broadly to businesses around the world.

So, there are lots of reasons to be fearful of Crowdstrike now and yet Buffett tells us to buy when we are fearful. So, is this stock worth buying now or is it about to slip further? And is the fear justified?

Key Points

• Crowdstrike faces significant reputational damage and financial risks due to a global outage, and needs to regain client confidence while addressing potential liabilities.
• Despite historical growth suggesting a 48.3% upside, recent disruptions raise questions about its future valuation.
• The current volatility makes buying Crowdstrike shares risky but potentially with a large payoff.

Why Buy Crowdstrike?

Buying Crowdstrike now is very much a double-edged sword. On the one hand the risks are enormous if clients depart en masse and lawsuits are filed. On the other hand, Crowdstrike has historically had a near pristine record of revenue growth. We went back all the way to the inception of the firm as a public company and could not find a single quarter where it did not grow year-over-year.

That’s why when a discounted cash flow forecast analysis is run, it arrives at a pretty similar spot to where analysts consensus sits, at $369 per share, representing 48.3% upside opportunity.

But those cash flows were based on past history repeating in the future. Now the train is no longer fully on the tracks. It’s been seriously derailed and the looming question is whether the valuation should be dramatically cut as a result?

Will Crowdstrike Go Bust?

While investors may see their dilemma as being between buying a company with massive upside or one that will go bankrupt the reality is probably somewhere in the middle.

It’s likely that Crowdstrike will face some liability overhang as a result of the outage and as a result the formerly optimistic valuation analysis needs to be modified lower. So how do you play Crowdstrike?

Right now, buying Crowdstrike is akin to catching a falling knife. The chart looks downright scary and picking up shares now could payoff big time or be a fool’s gambit. That kind of coin toss investing rarely works out well over the long term across many plays.

Instead, the best path of action now might well be to sit tight and recognize that the upside is massive but may become even larger if the technical selloff persists. Wait for the stock to base and turn positive on the stock chart before diving in.

The risk of sitting is that a sharp snapback rally occurs but so far there are no signs of that occurring and so it’s likely the market is digesting the bad news and discounting the threats to the company with each passing day. If so, the time to buy may be soon, but perhaps not quite yet.