Can Crowdstrike Recover from its Colossal Catastrophe?

Wiki Commons. Microsoft Blue Death Screen.

Can Crowdstrike Recover from its Colossal Catastrophe?
Or, the reason to pick a cybersecurity ETF over investing in an individual company.
Or, how happy Apple and their customers are today… (Though it’s not a good idea to gloat publicly.)
 
 
Crowdstrike is having a pretty rough day. It’s difficult to be responsible for a software update that takes down Microsoft users worldwide, affecting everything from airlines to healthcare, emergency centers, shipping and finance. Flights have been canceled. Banking access has been troubled. Broadcasters couldn’t go on air. Not surprisingly, Crowdstrike’s stock opened $40 lower this morning, after an overnight -11% gap down. Microsoft lost almost 1%. Apple was steady, as was the iShares Cybersecurity EFT IHAK. The real question now is, “Can Crowdstrike recover from this colossal catastrophe?”
 
 
A Glitch, Not a Hack
One of the most important distinctions here is that it looks like a glitch and not a hack. (That’s what Crowdstrike and Microsoft are claiming.) That’s important because a glitch can be fixed. The damage is limited to a known scope. Companies and agencies won’t have to worry about breached access or data, or malware. Some businesses, including banks and emergency service centers, have reported that they have already implemented the repair.
 
While there will continue to be a lot of stern conversations and heated debates, both on-air and in boardrooms, the nature of cybersecurity as a 24/7 constant vigilance business, means glitches will happen. Up and down the supply chain, CTOs will be discussing an extra layer of protection to run checks on new software before it is widely distributed. Soon, there will be a refocusing of the mainstream conversation to frame it clearly as a fixed glitch rather than a breach or hack. And, the nature of the news cycle itself means that the story could easily disappear over the weekend. If the issue is a hack, that's going to be a much bigger problem.
 
The AT&T & Ticketmaster Data Breaches: A Snowflake Crisis
The data breaches at AT&T and Ticketmaster have created a crisis at another cybersecurity company, Snowflake. According to TechCrunch, Snowflake itself was attacked in one of the biggest breaches of the year, with data stolen from a number of its corporate customers, including AT&T, Ticketmaster, and others. Not surprisingly, Snowflake is one of the few cybersecurity companies that is trading close to its 5-year low.
 
Although Crowdstrike took an 11% hit on Friday, July 19, 2024, shares are still trading at $305/share. Crowdstrike shares hit almost $400 a share on July 5th, and have doubled over the past year. Even with the pullback of Friday, shares are very expensive. 
 
A Leading Cybersecurity Company
Crowdstrike is a leading cybersecurity company. As you can see in the chart below, it is ranked as a leader by the Forrester Wave, ahead of Palo Alto Networks, IBM and Cisco. Having Microsoft as your customer is no small feat. Year-over-year revenue growth was 33% in the first quarter of 2024 – another measure of how Crowdstrike is leading the industry. With an $86 billion market cap, this large cap company should be able to weather this storm, particularly if the story fades by Monday. If it were happening to a smaller company that would be more problematic. 
 

Affected? Not Affected? Keep It to Yourself.
Whether you are a corporation or an individual, be careful complaining about this bug. Criminals are already calling up customers, pretending to be from Crowdstrike, in order to gain access to their computers, or to convince them to download malicious programs that they claim will fix the problem. You just don’t want bad actors targeting you, or to know whether or not you have a Windows product or a Mac product. If the glitch didn’t affect you, consider yourself lucky but remember that, “Loose lips sink ships.”
 
ETFs 
Snowflake was a popular cybersecurity company because it is very famously owned by Warren Buffett’s Berkshire Hathaway. Berkshire purchased shares in the roadshow at $120/share. The company is now only worth about $130 a share. It is trading very far below its IPO and it’s high of $354, which was hit on October 29, 2021.
 
Snowflake’s troubles and today’s Crowdstrike crisis are reminders that, for most Main Street investors, it’s a better idea to minimize our risk by having an exchange-traded fund that is targeted for the industry we might be interested in, rather than investing in a hot stock. Ever since the meme stock phase, we have been seeing epic “shoot the moon” performance, followed by crash landing wipeouts.
 
Wall Street has proven to be a very volatile marketplace over the past five years. That can be smoothed out quite a bit with an exchange-traded fund, treated as a hot slice in our nest egg pie chart system. Rebalancing once, twice or three times a year is also an important strategy. Both are core curriculum at our Financial Freedom Retreats.
 
Bottom Line 
Crowdstrike will likely weather this unfortunate worldwide calamity, largely because it is looking more like a glitch and not a hack, because cybersecurity remains a top priority for all all of us, because cybersecurity companies have limited liability built into their contracts, and because the company’s leadership position in cybersecurity is very strong. In the short term, of course, the stock can take a hit, and could go lower. Shares are rather expensive, even with the 11% sell-off of today, which is another reason to consider switching over to a cybersecurity ETF.
 
The iShares IHAK cybersecurity ETF is trading close to a 5-year high, as well. For those who have had this exchange-traded fund for a while, now might be a great time to capture gains, while trimming back the slice to an age-appropriate percentage. If you are just now starting out in a cybersecurity targeted fund, consider dollar-cost averaging.

If you’d like an updated Cybersecurity Stock Report Card, email [email protected].
 

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