CrowdStrike specializes in endpoint protection through its AI-native platform called Falcon. The Falcon platform operates entirely in the cloud, allowing for rapid updates, scalability, and ease of deployment.

There’s a good white paper on CrowdStrike’s website published by IDC that explains the value of the CrowdStrike Falcon XDR platform. It stops breaches. But it also saves time by speeding up threat protection and response while also helping security teams do more with less. It saves money by reducing the cost of cybersecurity – companies can get rid of less effective platforms and consolidate point solutions. The IDC report found that customers realized a $6 return for every $1 invested with a 5-month payback period after they used the Falcon XDR platform.

CrowdStrike was virtually unstoppable this year until July 19 when a faulty software update to its Falcon Sensor security software system caused a global problem with computers running Microsoft Windows. It was a major blow for a cybersecurity company, especially one with a pristine reputation.

There was a lot of speculation that the outages would hurt their business from customers revolting, resulting in a loss in market share. However, when CrowdStrike reported at the end of August, the results were excellent with revenue up 32% year over year and adjusted earnings per share of $1.04 versus the 97-cent consensus. Even better, the company showed a gross retention rate of 98%, a sign that virtually no business was lost from the event.

More recently, the company held its annual Fal.Con conference in September and it seemed to get a great reception, with attendance up 30% versus last year. Microsoft CEO Satya Nadella spoke at the event which suggested the two companies have buried the hatchet. They’ve had this rivalry for years, but ironically the incident brought the two companies closer together. 

Shares of CrowdStrike may be up almost 40% since bottoming in early August, but it is still down more than 10% from the July 19 incident and about 23% from its closing high of $392.15 on July 1. This could be an opportunity since virtually no business was lost. Our initial price target is $350, which is roughly where the stock traded right before the July 19th outage. We think the stock should return to these levels since virtually no business was lost.

You might be wondering if adding CrowdStrike to the portfolio means that we are heading to the exit on Palo Alto Networks. Does having two cybersecurity companies violate our rules about diversification? We typically don’t like to double up in one area, but we think there is room in the portfolio for both of these best-of-breed names because of position sizing. Palo Alto Networks isn’t that big of a position in the portfolio anymore because of all the huge gains we’ve locked in. Cybersecurity is a great area to be invested in. We’re in an elevated threat environment given all the hostilities happening around the world. Artificial intelligence and Gen AI have made bad actors more sophisticated, so corporations need to invest with the leaders in the industry to stay protected. We’re almost a year into the new SEC rules surrounding the disclosure of cybersecurity incidents, and greater awareness of threats has been a tailwind.