CRWD Stock Alert: Hold Off On CrowdStrike After Disastrous IT Outage

CrowdStrike Holdings (NASDAQ:CRWD) stock was cratering after being discovered responsible for a disastrous technology outage that grounded flights and disrupted financial systems around the world.

The extent of the damage from the worldwide information technology outage on July 19 is still being assessed. However, the hit to CrowdStrike’s reputation and stock have been immediate.

On the day of the outage, CrowdStrike stock fell nearly 10%. That worsened a pullback that was already underway as investors rotate out of technology securities and into small-caps. Analysts were already raising concerns about CRWD stock’s sky-high valuation. The stock is nearly 20% lower in the last five days

Given the issues that are piling up, investors would be smart to remain on the sidelines with CrowdStrike stock for the time being.

Worst Blackout Ever

It’s not every company that gets blamed for the worst technology blackout ever. But that’s the situation facing CrowdStrike after one of its technical updates contained a bug that spread around the world.

As a result, banks, airlines, television broadcasters, and megacap technology companies such as Microsoft (NASDAQ:MSFT) all reported major service disruptions due to the glitch with a CrowdStrike software update.

To its credit, CrowdStrike was quick to acknowledge the problem and stressed that it was not the result of a cyberattack. Still, the damage has been massive and far-reaching.

In Germany, hospitals were forced to cancel elective surgeries because of the outage, and in the England the BBC children’s television channel was taken offline.

Stateside, the Federal Aviation Administration grounded all flights and Microsoft’s cloud service customers were confronted with blank screens and error messages.

The big questions now is: How damaging is all of this to CrowdStrike’s reputation? The stock price decline indicates that it will be pretty big.

CRWD Stock Valuation Concerns

Even before the IT outage sent CrowdStrike stock spiraling downward, shares were reeling, having pulled back 13% over the past month.

This was largely because of analysts sounding the alarm over CrowdStrike stock’s valuation, which is sitting at nosebleed levels. CRWD stock is currently trading around 600 times future earnings estimates.

Before the decline that’s taken place, the stock was trading at a price-earnings ratio of more than 700. That’s extreme by any measure and makes CrowdStrike one of the most expensive stocks to own in the current market.

Valuation was the main reason why analysts at Piper Sandler (NYSE:PIPR) downgraded CrowdStrike stock at the start of July to a “hold” equivalent rating from a “buy” previously.

Yet despite its pricey valuation, the consensus view among 32 Wall Street analysts is that CRWD stock is a “strong buy” with a median price target that is more than 20% above current levels.

Of course, this was before the global IT outage. The current ratings are sure to change in coming weeks.

Sell CrowdStrike Stock

Removing the worldwide tech outage from the equation, CrowdStrike is still a very expensive stock to own. The shares are trading at a huge premium after doubling in the last 12 months. But adding in the negative impacts of the global IT outage and hit to CrowdStrike’s reputation, and investors would be well-advised to remain on the sidelines with this stock for the near-term. Financial problems stemming from the tech outage are sure to surface in coming quarters. Right now, CrowdStrike stock is not a buy.

On the date of publication, Joel Baglole did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.