Shares of cybersecurity specialist CrowdStrike Holdings (CRWD -3.55%) were down 39.5% during July, according to data provided by S&P Global Market Intelligence. The company went into the month riding high after a strong financial report in June and after being included in the S&P 500. It closed July 1 at an all-time high only to plunge thereafter due to a costly mistake.
On July 19, U.S. investors awoke to reports of what some experts were calling the largest IT outage ever. While investors were sleeping, CrowdStrike released a defective update to its software that caused Microsoft-based IT systems to go down. The outage was perhaps most notable for airlines, which were forced to cancel and delay flights.
CrowdStrike quickly worked to repair the defective update. But the stock obviously dropped immediately from the negative press. And it has continued to drop because the repercussions are far from over.
For example, Delta Air Lines CEO Ed Bastian told CNBC that the outage cost the company roughly $500 million and that it has “no choice” but to seek damages, and it has already hired a lawyer. And Delta is just one company — there are many more worldwide that aren’t happy with CrowdStrike.
The bigger risk today
It’s a good thing that CrowdStrike has an amazing balance sheet. The company had a roughly $3 billion net-cash position as of April 30. It’s possible the balance sheet could take a hit over the rest of this year and beyond as Delta and others look for compensation.
There’s a potential longer-term problem, too. The company had expected to profitably grow its revenue by over 30% this year. But that guidance assumed winning many new customers and upselling existing customers on new products.
These customers and potential customers might think twice now before signing any contracts with CrowdStrike anytime soon, especially considering there are competing products on the market.
Looking at CrowdStrike stock now
CrowdStrike stock has quickly plunged about 45% from all-time highs. One might think it now trades in value territory, but that’s not quite the case. In fact, currently trading at 16 times sales, CrowdStrike stock is still significantly more richly valued that it was at this time last year.
CRWD PS ratio data by YCharts; PS = price to sales.
To be clear, 16 times sales for CrowdStrike stock would have seemed like a steal earlier this year — the business seemed unstoppable and the profits are spectacular. But sales growth could stall, and the exact financial repercussions of the defective software update are still not clear. Therefore, the valuation today is a high price to pay considering how big the unknown risks could be.
Jon Quast has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends CrowdStrike. The Motley Fool recommends Delta Air Lines. The Motley Fool has a disclosure policy.
