What happened:
Shares of cybersecurity company CrowdStrike (NASDAQ:CRWD) rose 5.9% in the morning session as markets bounced back from an initially muted reaction to the Fed’s rate cut, which fueled renewed appetite for risky assets. While investors were expecting a rate cut from the U.S. central bank, there was some back-and-forth over whether the cut would be 25bps (a quarter of a percent) or 50bps (half a percent).
The Fed ultimately cut its policy rate by 50 bps (0.5%) to 4.75%-5.00%, the first rate cut in about four years. As a reminder, the Fed, under Chairman Jerome Powell, began raising rates to address inflation stemming from the COVID-19 pandemic when a confluence of supply chain disruptions, labor shortages, and stimulus spending sent inflation soaring.
Looking ahead, the Fed indicated that more austerity is possible in 2024/25. All in all, the announcement and outlook provided a breath of fresh air and a clearer picture of the Fed’s monetary policy that the market has been waiting for with bated breath. If there’s one thing the market doesn’t like, it’s uncertainty.
The driver of a stock’s value is the sum of its future cash flows, discounted back to today. The result of lower interest rates, all other things being equal, is higher stock valuations. This is especially true for higher growth stocks, such as those in the technology sector, where current value is more dependent on cash flows many years in the future.
As a reminder, a software update to the company’s Falcon platform was the culprit behind a global outage in July 2024 that caused flights to be canceled, hospital appointments to disappear, and TV stations to miss radio coverage of the outage. Shares subsequently fell dramatically as the market wondered whether the flawed update and outage would cause irreparable damage to the company and its brand. So far, the damage appears to have been limited. Still, the market is trying to find the right price for an asset that is a leader in its sector, growing rapidly and profitable, but not immune to setbacks.
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What the market tells us:
CrowdStrike shares are highly volatile, with 14 moves of more than 5% in the past year. In that context, today’s move indicates that the market sees this news as meaningful, but not something that would fundamentally change perceptions of the company.
The last major move we wrote about was 21 days ago, when the stock jumped 5.8% on news that the company had announced second quarter earnings. The quarter itself was solid, with ARR (annual recurring revenue), revenue, and operating profit all beating out. With the stock dropping from nearly $380 in mid-July to $265 due to the massive fallout from a flawed CrowdStrike Falcon update on Windows machines that wreaked havoc on airlines, hospitals, and other key parts of the global economy, the market was concerned that the numbers could look pretty bad in the short term. Interestingly, the company did provide some positive updates. These include 1) Multiple large deals (7, 8, and even one 9 figure deal) that closed following the incident; 2) Gross retention rates up year-over-year over the past 5 weeks; and 3) The CNAPP (Cloud-Native Application Protection Platform), SIEM (Security information and event management), and identity modules collectively surpassed $1 billion ARR.
However, the outlook was disappointing, as full-year revenue was cut and the next quarter’s revenue forecast missed Wall Street estimates. However, this seems ‘better than feared’. These results prove that while there are headwinds from the outage, the headwinds are not that bad (for now).
CrowdStrike is up 14.8% year to date, but at $283.82 a share, it’s still 27.6% below its 52-week high of $392.15, set in June 2024. Investors who purchased $1,000 worth of CrowdStrike stock five years ago are now looking at an investment worth $4,119.
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