Is It Time to Buy the Dip on CrowdStrike Stock?

CrowdStrike (NASDAQ: CRWD) stock had a difficult summer, slipping badly since an automatic software update it pushed to its clients caused millions of computers to crash. With the stock down by around 30% from its highs, investors may wonder if they should take this opportunity to open a position.

The company's fiscal second-quarter report right around the corner on Aug. 28, so the clock is also ticking for investors to buy the stock before a major news announcement. Is it time to buy or should investors stay patient?

CrowdStrike may emerge from this blunder fairly unscathed

CrowdStrike is a major cybersecurity firm and the market leader in several security products. Its Falcon platform is an ecosystem of multiple products that tie together to make an all-encompassing cyberprotection solution.

However, after the blunder it made in July, it's fair to question if CrowdStrike can maintain its market leadership.

When considering that risk, it's important to recognize that CrowdStrike is not an easy provider for clients to switch from. While there are many companies that offer services similar to one or another of CrowdStrike's modules, there isn't another one that provides a total solution. This means any client that wanted to jump ship would have to piece together their new cybersecurity solution with multiple providers to get the same degree of protection that CrowdStrike offers. This is both expensive and complicated, and it's a huge reason why I don't think CrowdStrike will see a mass cancellation in the aftermath of the update error.

Further supporting that argument, as of its fiscal 2025 first quarter (which ended April 30), 65% of CrowdStrike's customers were using at least five of its modules. Given that such a large share of its clients are so deeply integrated with its software, it's hard to imagine a scenario where many of them cut ties with CrowdStrike.

I'll be watching its fiscal Q2 report carefully to see if this figure drops and how many customers it loses. Both of these factors will impact CrowdStrike's annual recurring revenue (ARR) figure, which is a key metric for CrowdStrike. In Q1, this figure was $3.65 billion, up 33% year over year. CrowdStrike also reports on its new ARR, which gives investors an idea of how much business it added each quarter.

If CrowdStrike shows any amount of growth in these two metrics, most investors will be impressed, as it was likely hard to close deals in the aftermath of the widespread system outages it caused.

One factor that gives me hope that these results won't be terrible is that CrowdStrike hasn't preannounced its earnings. Companies often do that if a quarter's results will be significantly out of the guidance range they gave previously. So the fact that management hasn't said anything yet hints that Q2's earnings aren't going to be as bad as some fear.

But does that add up to a stock that's worth buying right now?

The stock still carries a premium price tag

Before the update crash and the subsequent stock price plunge, CrowdStrike stock carried a premium valuation because it was viewed as the best company in its industry and was executing at an incredibly high level.

Trading at nearly 100 times free cash flow and 30 times sales, CrowdStrike was likely due for a pullback anyway. However, nobody wanted to see one caused by an internal error.

CRWD PS Ratio data by YCharts.

After the sell-off, CrowdStrike trades at 64 times free cash flow and 20 times sales. Yet neither of those levels can be considered cheap. Indeed, other cybersecurity providers like Okta, Zscaler, and SentinelOne are all still cheaper than CrowdStrike.

Data source: YCharts.

So even after CrowdStrike's big sell-off, it's still a far more expensive stock than its peers. And while its execution before the update blunder was top-notch, there's no way to know how much that blunder is going to affect CrowdStrike in the long run.

Given the premium that the stock still carries, I'm not sure how much upside there is for it, even if CrowdStrike reports a good quarter. As such, I think investors would be better off staying patient and not acting until after it reports earnings on Aug. 28.

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Keithen Drury has positions in CrowdStrike. The Motley Fool has positions in and recommends CrowdStrike, Okta, and Zscaler. The Motley Fool has a disclosure policy.