CRWD Stock Alert: Hold CrowdStrike After Catastrophic IT Outage

CrowdStrike Holdings (NASDAQ:CRWD) saw its share price plummet after it was discovered that it was responsible for a catastrophic technology failure that grounded flights and disrupted financial systems around the world.

The extent of the damage from the global IT outage on July 19 is still being assessed, but CrowdStrike’s reputation and share price were immediately damaged.

On the day of the outage, CrowdStrike stock fell nearly 10%, exacerbating a slide that had already begun as investors moved out of technology stocks and into small-cap stocks. Analysts were already raising concerns about CRWD stock’s sky-high valuation. The stock has fallen nearly 20% in the past five days.

Given the mounting problems, it would be wise for investors to hold off on CrowdStrike shares for the time being.

The worst power outage ever

Not every company gets blamed for the worst technology outage ever, but that’s exactly the situation CrowdStrike finds itself in after one of its technical updates contained a bug that spread around the world.

As a result, banks, airlines, television networks and mega-cap technology companies such as Microsoft (NASDAQ:MSFT) all reported major service disruptions due to the disruption to a CrowdStrike software update.

CrowdStrike must be credited with quickly recognizing the problem and emphasizing that it not the result of a cyber attack. Nevertheless, the damage is enormous and far-reaching.

In Germany, hospitals had to cancel planned operations due to the power outage and in England the BBC children’s television channel was taken off the air.

In the US, the Federal Aviation Administration (FAA) banned all flights and customers of Microsoft’s cloud service were faced with blank screens and error messages.

The big question now is: How damaging is all this to CrowdStrike’s reputation? The drop in the stock price suggests that the damage will be quite significant.

Concerns about the valuation of CRWD shares

Even before the IT outage sent CrowdStrike’s share price into a tailspin, the price had been faltering and had lost 13 percent in the last month.

This was mainly because analysts were raising alarms about CrowdStrike stock’s valuation, which is at horrendous levels. CRWD stock is currently trading at 600 times forward earnings estimates.

Before the price drop, the stock’s price-earnings ratio was over 700. This is extreme by any measure and makes CrowdStrike one of the most expensive stocks on the market right now.

The valuation was the main reason why analysts at Piper Sandler (NYSE:PIPR) downgraded CrowdStrike shares from “buy” to “hold” in early July.

But despite the high valuation, 32 Wall Street analysts agree that CRWD stock is a “strong buy,” with an average price target more than 20 percent above current levels.

This was of course before the global IT outage. Current valuations will certainly change in the coming weeks.

Sell ​​CrowdStrike shares

Leaving aside the global IT outage, CrowdStrike is still a very expensive stock. Shares are trading at a huge premium after doubling in the past 12 months. But when you add in the negative impact of the global IT outage and the damage to CrowdStrike’s reputation, investors would be well advised not to buy this stock in the near future. Financial problems due to the IT outage are sure to crop up in the coming quarters. Right now, CrowdStrike stock is not shopping.

As of the publication date, Joel Baglole had no position (either directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the author and are subject to InvestorPlace.com’s disclosure policies.