The Microsoft (MSFT) Windows outage sparked by a CrowdStrike (CRWD) quality control bug was the IT disaster that swept the world just two weeks ago. Undoubtedly, the magnitude of the disruption was gargantuan, with airlines, hospitals, manufacturers, and a number of other mission-critical companies going down for varied durations. It was the biggest IT meltdown of the modern era, and it put cybersecurity stocks in the spotlight.
It’s probably going to take a heck of a lot more than a mere $10 Uber (UBER) gift card for CrowdStrike (the firms sent $10 gift cards to its partners) to make things right for those who felt the impact of a human oopsie that never should have had a remote chance of happening.
Fast forward to today, and things have (mostly) gone back to business, with around 97% of Windows sensors back online as of four days ago. What hasn’t come back, however, is CRWD stock, which has been left devastated. CrowdStrike, a leader in endpoint security solutions, now sees its stock down 42% from its all-time high, raising questions about whether the company’s role in widespread outages is forgivable.
Such a blunder may be good news for other players in the cybersecurity market, however. Palo Alto Networks (PANW), known for its advanced network security solutions, is an obvious beneficiary that could scoop up the business of clients who are sure to be wary of CrowdStrike. Indeed, a name change would probably do CrowdStrike a service right about now.
In any case, let’s use TipRanks’ Comparison Tool to compare CrowdStrike against top rival Palo Alto Networks in this post-outage environment. For the record, I am bullish on both stocks at current multiples.
CrowdStrike (CRWD)
Though CrowdStrike’s reputation will forever be tarnished, some contrarians, like ARK Invest’s Cathie Wood, are more than willing to take the plunge into CRWD stock. When the opportunity to buy CRWD stock on the dip came knocking, Wood did not hesitate, scooping up more than 38,000 shares (worth just shy of $12 million) in a day. She’s still a fan of the platform and its growth potential.
Though CrowdStrike is bound to lose some business due to its costly glitch, I think Wood is on the right track. The odd hiccup can happen to any company. And though embarrassing, such human errors really don’t take a whole lot away from the longer-term growth narrative. CrowdStrike definitely deserved to be put in the penalty box, but a 40% sell-off is overdoing it.
Some big-name analysts are in the same bull camp as Wood. Notably, Bank of America (BAC) Securities analyst team led by Tal Liani recently reiterated its Buy rating but slashed the price target by $35 (or around 9%) to $365.
Why the cut? Costs involved with the aftermath of the disaster, among other issues, could linger over the medium term. I’m in agreement with Liani. A 9% cut to the stock’s value—rather than a more than a large meltdown—seems more reasonable.
It’s going to cost a whole lot more to make things right for the many who were wronged. But in two to three years from now, this IT crisis will (hopefully) be forgotten. Given the magnitude of news-worthy cybersecurity attacks that could come between now and then, I’d argue that CRWD’s July 2024 crisis may not feel as horrid as it does right now while it’s still fresh.
I believe CrowdStrike will triple down on its quality assurance after the mess to prevent future glitches. As it bolsters its endpoint security solution in an AI-leveraging cyber threat world, perhaps bulls like Wood will look smart buying this dip over an issue whose impact will be relatively short-lived.
What Is the Price Target for CRWD Stock?
CRWD stock is a Strong Buy, according to analysts, with 29 Buys, seven Holds, and one Sell assigned in the past three months. The average CRWD stock price target of $363.59 implies 55.6% upside potential.
Palo Alto Networks (PANW)
CrowdStrike’s loss seems to be a short-term gain for Palo Alto Networks. The stock, which had been steadily recovering from a steep February plunge, may just be able to swoop in and steal a bit of CrowdStrike’s lunch. The company, which markets itself as using AI to fight AI, still has a pretty good reputation with clients relative to CrowdStrike. Not being responsible for a historic outage will do that.
In any case, I view the window to steal CrowdStrike’s lunch as mostly limited, given that CrowdStrike has taken steps to make things right and the likelihood that we’ll all soon forget about the traumatic outage in the coming quarters and years.
In addition to getting things back online and identifying the cause of the glitch to ensure it never happens again, CrowdStrike is also taking accountability. Cleaning up the mess is one thing, but it’s another thing to apologize and commit to change.
That’s not to say that Palo Alto Networks isn’t a fantastic cybersecurity stock in this post-CrowdStrike outage environment. Its AI-centric offering (Precision AI) marks the next frontier for cybersecurity. That said, I wouldn’t treat CrowdStrike’s woes as a big tailwind for Palo Alto. It’s a transitory event that I think clouds the longer-term story at hand. For Palo Alto and CrowdStrike, it’s all about harnessing the power of generative AI to protect and guide customers.
Recently, Redburn Atlantic’s Nina Marques downgraded both PANW and CRWD shares, noting that the “market may be overestimating future growth.”
Specifically, Marques noted that generative AI is more of a “short-term” demand accelerator, not a “sustainable trend.” Shares of both cybersecurity stocks were under pressure following the note. If cybersecurity growth does end up slowing from here, it’s better to ride with the cheaper, AI-savvy firm. Right now, that’s Palo Alto, it’s cheaper than CrowdStrike, and it has all the AI savvy minus the IT outage overhang.
At current levels, PANW stock goes for 51.3 times forward price-to-earnings (P/E), well below CRWD’s 64.5 times forward P/E.
What Is the Price Target for PANW Stock?
PANW stock is a Strong Buy, according to analysts, with 32 Buys and seven Holds assigned in the past three months. The average PANW stock price target of $346.37 implies 9.1% upside potential.
The Takeaway
CrowdStrike is supposed to be one of the top cybersecurity firms, so an “error” on its part makes it look like a firm that is less than capable of handling something mission-critical.
Either way, I think the opportunity for peers to take market share in light of the outages is mostly limited. The superior gen-AI cybersecurity innovation will act as the biggest long-term growth driver as we steer into the modern age of AI-infused cybersecurity. On that front, Crowd and Palo Alto stand out as frontrunners.
With the cheaper multiple and no outage aftermath woes to worry about, I’d have to go with PANW as the better pick right now.
