When cybersecurity firm CrowdStrike Holdings reports second quarter earnings on Aug. 28, Wall Street expects earnings growth to slow sharply in the wake of a widespread IT outage on July 19 caused by a defective software update. The big question for CrowdStrike stock is whether management will lower full-year guidance and by how much.
Meanwhile, CrowdStrike stock has clawed back a bit from a 52-week intraday low of 200.81 set on Aug. 5. CrowdStrike stock is now up nearly 6% in 2024. The shares hit a 52-week high of 398.33 on July 9. Shares were up 56% in 2024 on that day.
CrowdStrike Stock: Crisis Management
"CrowdStrike's Q2 print on Wednesday will likely be one of the most-watched events in cybersecurity if not all of software," said Deutsche Bank analyst Brad Zelnick in a report. "CEO George Kurtz and his leadership team have showcased a textbook example of crisis management following the outage, but ultimately investors will focus on the near-term disruption and any longer-term impact to the company's goal of achieving $10 billion in revenue in 4 to 6 years."
Estimates for the July quarter have been coming down, particularly for subscription-based annual recurring revenue. That's a key financial metric for CRWD stock. In the April quarter, new ARR rose 22% to $212 million. For the July quarter, analysts expect new ARR of $195.5 million, flat from the previous year. Moreover, analysts also are modeling flat new ARR for the October quarter.
But the big question is whether CrowdStrike will slash its fiscal 2025 outlook. Some analysts say a deep cut might work best for the cybersecurity stock in the long run.
"We would expect CrowdStrike to guide conservatively given the uncertainty following the outage," William Blair analyst Jonathan Ho told IBD. "We believe investors want to see a de-risked guidance given the wide range of outcomes in terms of how customers may react. Also, we would expect some kind of pricing concessions, difficulty closing deals, discounts and other measures will be required to assuage customer concerns. But there hasn't really been a close precedent to determine the potential magnitude. Because most of CrowdStrike's contracts are on a subscription basis, it will take some time to flow through."
UBS analyst Roger Boyd holds a similar view for CRWD stock.
CrowdStrike Stock: 'Kitchen Sink' Guidance?
"Despite checks that are sounding better than expected on July quarter results and second half expectations, we'd expect investors would prefer a conservative, 'kitchen-sinked' second half guide," said Boyd in a report.
Jefferies analyst Joseph Gallo said in a report: "We believe it has become increasingly likely CrowdStrike could kitchen sink fiscal 2025 guidance, which should encourage investors to step in and defend de-risked numbers."
And, CrowdStrike spent heavily following the incident to help customers restore computer systems. The tech outage impacted the PCs and laptops of businesses, government agencies, schools and hospitals.
Analysts estimate July quarter adjusted EPS of 97 cents per share for CRWD stock, up 31% versus 63% growth in the April quarter. Revenue is expected to climb 31% to $958.3 million vs. 33% sales growth in the April quarter.
Bank of America analyst Tal Liani said in a report: "We do believe the IT incident, which occurred 10 days before quarter end, likely led to some delays in sales cycles, and/or some kind of discounting to customers."
He added: "We expect management to take a conservative approach and reduce fiscal year guidance to account for potential impacts from the incident. We crudely assume fiscal 2025 revenue growth of 28% versus prior guidance of 31%, yet this number could materially deviate from our estimate."
For fiscal 2026, analysts project new ARR growth of only 11.6% to $980 million.
While the cybersecurity firm has rebounded a bit from its Aug. 5 low, some analysts say investors should be cautious heading into the Q2 CrowdStrike earnings report.
CrowdStrike Earnings Report: Call Options
One strategy around CrowdStrike earnings would be to use call options.
That approach would let investors cap their possible loss while still letting them participate in any post-earnings upside.
At BMO Capital Markets, analyst Keith Bachman said investors should stay on the sidelines until the company updates fiscal 2025 guidance.
"Post the outage, we think negotiations between CrowdStrike and customers have yet to begin," he said in a recent report. "Nevertheless, we are lowering our estimates across the board, including reducing our fiscal 2025 net new ARR forecast by about $460 million, which is meaningfully below other recent CRWD estimates changes."
He added: "Given meaningful risk and uncertainty of future estimates, we believe investors should wait for revised fiscal 2025 guidance before moving more aggressively on the shares."
On Sept. 10, Microsoft and CrowdStrike will host a security summit to discuss steps to improve security and resiliency for joint customers.
Also, CrowdStrike hosts an annual user conference and analyst day on Sept. 18. It may provide more information at the event as well.
CrowdStrike Stock: Palo Alto To Gain?
CrowdStrike competes with Palo Alto Networks, SentinelOne, Microsoft and others in the "endpoint" market. Endpoint security tools detect malware on laptops, mobile phones and other devices that access corporate networks.
According to research firm IDC, Microsoft holds nearly 26% market share in endpoint security, followed by CrowdStrike at 18%.
Meanwhile, CrowdStrike is building a broad, threat-detection cloud computing platform called XDR, or extended detection and response. Further, it monitors endpoints as well as web/email gateways, web application firewalls and cloud business workloads.
Shares in both Palo Alto and SentinelOne have gained in the wake of CrowdStrike woes on views they may gain market share. Palo Alto stock has advanced 19% in 2024. Further, SentinelOne stock has retreated 8% in 2024 despite a big rally the past month.
Also, CRWD stock is among cybersecurity stocks to watch.
CrowdStrike Liability From IT Outage
In a blog post July 20, Microsoft estimated that 8.5 million Windows devices were impacted by the CrowdStrike outage.
What's more, Delta Air Lines plans to seek compensation for IT outage, which disrupted flights worldwide. But CrowdStrike's liability may be limited, analysts say.
Still, customers could seek discounts or credits for both new contracts and renewals.
At Bank of America, Liani said in a report: "While the incident was not related to the quality issues of CrowdStrike's solution, it did flag a material potential weakness in the company's Quality Assurance procedures. We see risks of existing customers delaying purchases of additional modules as they try to gain confidence in CrowdStrike's processes. We also believe customers might ask the company for additional discounts to help cover the cost of disruption."
At RBC Capital, analyst Matthew Hedberg in a report said he expects CrowdStrike to lose only a few customers as a result of the IT outage.
"We think discounting will be elevated while churn will be minimal," he said. "While the stock has underperformed recently, we continue to like the long-term outlook and think the outage will be in the rearview mirror later this year."
Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on artificial intelligence, cybersecurity and cloud computing.
