July was a pretty bad month for CrowdStrike (NASDAQ: CRWD) investors. The cybersecurity company has been thrown into a product-focused and public relations frenzy after an identified bug in a recent software update. The outage has affected tens of thousands of customers worldwide and led to widespread panic selling among investors.
In the month of July, CrowdStrike shares fell 44%, wiping out nearly $30 billion in market cap. Could this be a lucrative opportunity to buy the dip in CrowdStrike stock, or is the worst yet to come?
Maybe CrowdStrike needed this
According to reports from the first quarter of fiscal year 2025 (ended April 30), CrowdStrike grew its annual recurring revenue (ARR) by 33% year over year to $3.65 billion. What’s more, after years of burning cash, the company is now consistently profitable – with net income of $132 million over the past 12 months.
Overall, this level of revenue acceleration, combined with consistent and increasing profitability, makes CrowdStrike a strong company.
However, a closer look at the company’s valuation suggests that the current stock sell-off isn’t such a bad thing. Before the software outage news broke, CrowdStrike’s market cap was hovering around $95 billion. That’s a pretty big deal for a company that generates about $3 billion in revenue.
Even after a sharp drop in stock price in May, followed by the recent sudden sell-off, CrowdStrike still is trading at a price-earnings ratio (P/E) of 437.
Investors have been buying CrowdStrike stock faster than the company’s earnings are growing, causing the company’s value to skyrocket. There’s a legitimate case to be made that CrowdStrike still pricey, even after the July sale.
Still, a look at a similar event in recent history suggests that the current compression in valuation multiples could indicate that this is a good buying opportunity. And this could be the most normalized price you’ll see.
A journey back in time
One of the most high-profile cyberattacks in recent history occurred in 2017, when a consumer credit bureau Equifax was hacked, with over 160 million private records being compromised.
Following news of the data breach in late 2017, Equifax shares fell by about 37%. However, Equifax shares recovered for much of 2018, reaching levels similar to those seen before the split.
Unfortunately, Equifax shares had returned to their previous lows by the end of 2018, following disappointing earnings and continued reputational damage.
Where will CrowdStrike stock be in a year?
There are a few key ideas to digest given the information discussed above.
In the case of Equifax, the stock price experienced a volatile journey for about a year after the breach. On the one hand, shares began to recover for most of 2018 as investors began to think the worst news was behind them. But the sharp decline toward the end of 2018 shows that reputational damage can take a long time to recover from, and even the slightest sign of a hiccup in the business can create fear and doubt among investors.
This could indicate a similar recovery path for CrowdStrike. Because the company operates at the intersection of artificial intelligence (AI) and cybersecurity, the market potential remains enormous. In other words, the total addressable market variable does not change here.
The thing that probably shall change is CrowdStrike’s ability to penetrate the market, as its tarnished reputation can make customers think twice before purchasing its products.
I think expectations for CrowdStrike are low enough right now that if the company shows even the slightest turnaround, the stock could jump. However, as we saw with Equifax, these gains can be fleeting and the stock price could easily be the same a year from now as it is today.
The key lesson we can learn from Equifax is that the stock eventually recovered, but over a longer time horizon. Today, Equifax is trading at $280 a share — up 211% from its 2018 low of $90.
Given the strong secular tailwinds fueling both AI and cybersecurity, I believe CrowdStrike’s best days are yet to come. While this turnaround could take years, I think it’s shortsighted to label CrowdStrike as a falling knife.
Despite the high valuation, I think now is a good time to buy CrowdStrike stock at more normal levels compared to previous periods and hold for the long term.
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Adam Spatacco has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends CrowdStrike. The Motley Fool has a disclosure policy.
Where Will CrowdStrike Stock Be in 1 Year After a 44% Drop? was originally published by The Motley Fool
