On Friday, a global IT outage that has rarely been seen before swept across the world, leaving thousands of flights grounded, locking out millions of employees from their computers, and basically grinding global business to a halt. The lost sales and productivity likely reached into the billions, and it was all because of a company whose sole purpose is to PREVENT something like this from happening. A company firmly entrenched in our portfolio. Our first pick! CrowdStrike (CRWD).A lot of media outlets are properly calling this event an “eye-opener” as to the dangers of consolidation and automatic system updates. CrowdStrike pushed out an update to its Falcon endpoint monitoring software that, essentially, broke any Windows device it was installed on. Almost as bad, fixing the problem could NOT be automated, and requires an IT employee with administrator access to manually access the affected computer and delete a file. When you consider that many enterprise businesses have IT infrastructure that can reach into the tens of thousands of computers, the pain of this mistake is made clear.
What Now For The Stock?
An event like this does not go without repercussions for the company and the stock, and frankly, I was surprised it was only down 11% on Friday. It still trades more than 20% above my fair value of $251.There is little doubt many CrowdStrike adopters are having some second thoughts now about giving the company so much power over their IT infrastructure. Elon Musk, bluster aside, tweeted that his companies deleted it, and I think this kind of sentiment should probably be taken seriously by CrowdStrike investors.In any case, this event is going to make expanding deals and winning new business a lot harder in the short term. I believe we are also likely to see some meaningful litigation settlements, considering the amount of business that was likely lost to the outages.Finally, and this is my main worry, something like this is just a reputation killer. Warren Buffett’s famous quote that reputations “take a lifetime to build and a minute to destroy” is pretty apt here. How can such a huge, important cybersecurity firm roll out a faulty patch like this worldwide?! Even the most basic software rollout procedures usually involve pushing out changes to a small population at first to make sure nothing unexpected takes place. I’m worried this is a sign of hidden dysfunction within the company’s development operations.
Selling – For Now
As a result of all this, I’m making CrowdStrike our very first sell recommendation. Ultimately, it performed well for us, delivering gains of 119% and beating the market by over 80% in less than 2 years of holding. We will take those gains and sit back and watch how the story develops from here. I think it is far more likely that the stock is going to underperform for the next many months from current prices.I’m not throwing it away entirely though! CrowdStrike will move to the watch list where we can keep an eye on it, and, should things settle down, possibly jump back in, in the future.More By This Author:TSMC Reports Q2 Results
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