What Happened:
Shares of cybersecurity company CrowdStrike (NASDAQ:CRWD) jumped 5.9% in the morning session as markets roared back after an initially muted response to the Fed's rate cut, which sparked a renewed appetite for risk assets. While investors were expecting a reduction in rates from the US central bank, there was a bit of back and forth on whether the cut would be 25bps (a quarter percent) or 50bps (half a percent).
The Fed ended up slashing its policy rate by 50bps (0.5%) to 4.75%-5.00%. This marks the first rate reduction in roughly four years. As a reminder, the Fed--under Chair Jerome Powell--began raising rates to tackle inflation coming out of the COVID-19 pandemic when a confluence of supply chain disruptions, labor shortages, and stimulus spending caused inflation to run hot.
Looking forward, the Fed signaled that more cuts are possible in 2024/25. Putting it all together, the announcement and outlook provided a breath of fresh air and a clearer view of the Fed's monetary policy stance, which the market has been waiting for with bated breath. If there's anything the market doesn't like, it's uncertainty.
The driver of a stock's value is the sum of its future cash flows discounted back to today. The result of lower interest rates, all else equal, is higher stock valuations. This is especially true for higher-growth stocks such as those in the technology sector, where the current value depends more on cash flows many years out in the future.
As a reminder, a software update on the company's Falcon platform was the culprit behind a global outage in July 2024 that canceled flights, made hospital appointments vanish, and prevented TV broadcasters from going on air to talk about the outage. The stock fell precipitously afterward as the market debated whether the flawed update and ensuring outage would cause irreparable harm to the company and its brand. Thus far, it seems like the damage has been limited. Still, the market is trying to figure out the right price for this asset, which is a leader in its space, growing quickly and profitable, but not immune to hiccups.
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What is the market telling us:
CrowdStrike’s shares are very volatile and over the last year have had 14 moves greater than 5%. In context of that, today’s move is indicating the market considers this news meaningful but not something that would fundamentally change its perception of the business.
The previous big move we wrote about was 21 days ago, when the stock gained 5.8% on the news that the company reported second-quarter earnings results. The quarter itself was solid, with ARR (annual recurring revenue), revenue, and operating profit all beating. With the stock going from nearly $380 in mid-July to $265 due to the massive outage from a flawed CrowdStrike Falcon update on Windows machines that wreaked havoc on airlines, hospitals, and other important parts of the global economy, the market feared that numbers could look quite bad in the near-term. Interestingly, the company provided positive updates. These include 1) Multiple large deals (7-, 8-, and even a 9-figure deal) closed after the incident; 2) Gross retention rates over the trailing 5 weeks up year on year; and 3) The CNAPP (Cloud-Native Application Protection Platform), SIEM (Security information and event management), and identity modules collectively surpassed $1B ARR.
Moving on, guidance was underwhelming, though, as full-year revenue was lowered and revenue guidance for next quarter missed Wall Street's estimates. However, this seems 'better than feared. These results prove that while there are headwinds from the outage, the headwinds aren't so bad (for the time being).
CrowdStrike is up 14.8% since the beginning of the year, but at $283.82 per share it is still trading 27.6% below its 52-week high of $392.15 from June 2024. Investors who bought $1,000 worth of CrowdStrike’s shares 5 years ago would now be looking at an investment worth $4,119.
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