Why CrowdStrike Fell Today on an Up Day for the Nasdaq

What happened

Shares of CrowdStrike (CRWD -3.71%) fell in today’s trading, down as much as 4.8% before recovering to a 3.7% decline as of the end of trading, even as the broader Nasdaq finished strongly, up 0.8%.

It wasn’t too difficult to figure out why, as a major Wall Street sell-side analyst downgraded CrowdStrike’s shares and lowered its price target ahead of the company’s earnings report on Wednesday.

But is this short-term call really something for long-term investors to worry about?

So what

Before today’s open, research firm Morgan Stanley downgraded its rating on CrowdStrike from overweight to equal weight, while lowering its price target on the stock from $178 to $167.

That’s not what CrowdStrike investors wanted to hear, as the stock is down to a price of around $143 today. However, it looks as though this is more of a short-term call based on the company’s upcoming earnings report, scheduled for release after the close of trading on Wednesday, and not necessarily a more grave warning for the long term. 

Morgan Stanley analysts apparently think earnings and forward guidance may come in lighter than expected. Of course, CrowdStrike has noted headwinds over the past year or more, as enterprises tighten their purse strings on cloud and software spend, even for mission-critical cybersecurity workloads.

The analysts noted a persistent slowdown in the telecommunications and retail industry verticals, which is where CrowdStrike has an outsize proportion of customers. Those types of businesses have been experiencing some real headwinds this summer, as high interest rates and cutthroat competition for customers eat into budgets in those industries.

The slowdown in the broader enterprise software-as-a-service (SaaS) industry is well known, and it had been thought 2023 would see the beginning of a recovery; however, Morgan Stanley now sees the recovery further off, and potentially not until the end of 2024. Meanwhile, the analysts note CrowdStrike will likely spend on new product categories, such as analytics and software observability, which could further weigh on margins.

All in all, with CrowdStrike having recovered about 42% this year after its big drop in 2022, the analysts believe the stock has run far enough if the recovery is delayed.

Image source: Getty Images.

Now what

Encouragingly, the analysts at Morgan Stanley noted they still like CrowdStrike over the long term. That means today’s downgrade wasn’t due to more serious issues, such as an erosion of CrowdStrike’s competitiveness or long-term market opportunity. Of note, CrowdStrike is a leading cybersecurity offering, built with a cloud and AI-first architecture from the ground up. 

Yet cybersecurity and software companies tend to trade at very high valuations as a multiple of their earnings and sales, and CrowdStrike is no different at 14 times sales and 62 times next year’s earnings estimates.

Long-term bond yields have also risen recently, which especially puts pressure on the value of growth stocks. If CrowdStrike also experiences a slower-than-expected revenue recovery, it wouldn’t be a surprise to see CrowdStrike’s stock take a breather, too.

Billy Duberstein has no position in any of the stocks mentioned. His clients may own shares of the companies mentioned. The Motley Fool has positions in and recommends CrowdStrike. The Motley Fool has a disclosure policy.

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