These 2 Tech Stocks Could Be in the Middle of Proving Warren Buffett Right
"It takes 20 years to build a reputation and five minutes to ruin it," says billionaire investor Warren Buffett.
Cybersecurity company CrowdStrike (NASDAQ: CRWD) and cloud data platform Snowflake (NYSE: SNOW) have each stumbled into the reality of this aphorism recently. Both companies operate in industries where trust is critical -- companies trust CrowdStrike to protect their critical infrastructure and devices, and they trust Snowflake with mountains of proprietary and sensitive data -- and both have made major missteps that could cost them in the long run.
An update gone awry
CrowdStrike's modular, cloud-based Falcon platform protects desktops, laptops, virtual servers, containers, mobile devices, and IoT devices. The platform has more than two dozen modules that collectively cover a wide array of security, identity, automation, and observability functions.
The company's platform is widely deployed, and many customers make use of multiple modules. About two-thirds of customers have adopted at least five modules, which speaks to the pervasiveness of the company's technology.
CrowdStrike wasn't hacked, but the next-worst thing happened on July 19. An update to the Falcon platform, which hooks deeply into the Windows OS when deployed on PCs, caused millions of PCs to crash around the world. This led to a cascade of real-world impacts, including widespread flight cancellations and IT problems at hospitals.
CrowdStrike stock tumbled on the news, and it has yet to fully recover. While there could end up being financial repercussions for CrowdStrike -- Delta Air Lines is reportedly seeking $500 million or more in compensation -- the damage to the company's reputation could cause far more pain in the long run.
Companies already using CrowdStrike may become hesitant to add on more modules and deepen their dependence on the Falcon platform, and prospective customers may seek out alternatives that don't come with any reputational baggage or worries about future missteps. The result could be a slowdown in CrowdStrike's growth rate.
With CrowdStrike stock trading for more than 16 times forward sales, any negative impact on growth could send shares tumbling anew.
A massive data breach
Snowflake's platform enables customers to consolidate data from multiple sources. While this makes deriving insights from that data simpler, it also creates a single point of failure.
Multiple Snowflake customers, including AT&T, Live Nation, and Advance Auto Parts, have had their data compromised as part of a large data breach involving Snowflake's platform. In the case of AT&T, call logs between certain dates for nearly all customers were accessed unlawfully.
Although the issue appears to be poor security practices on the part of Snowflake's customers rather than a flaw in Snowflake's platform, with Snowflake being the common denominator, it's likely that the company's reputation will suffer.
The company expects revenue to grow by 22% in the third quarter, down from a 30% growth rate in the second quarter. While there are multiple drivers behind the expected slowdown, Snowflake may be dealing with the aftermath of this data incident for some time.
Snowflake stock isn't quite as expensive as CrowdStrike stock, but it still trades for more than 8 times forward sales and well over 100 times forward adjusted earnings. A further slowdown later this year or in 2025 could drive the stock lower.
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Timothy Green has positions in AT&T. The Motley Fool has positions in and recommends CrowdStrike and Snowflake. The Motley Fool recommends Delta Air Lines and Live Nation Entertainment and recommends the following options: short October 2024 $90 puts on Live Nation Entertainment. The Motley Fool has a disclosure policy.
