What happened:
Shares of cybersecurity firm CrowdStrike (NASDAQ:CRWD) rose 5.9% in morning trading as markets recovered following an initially muted response to the Federal Reserve’s rate cut, which sparked renewed appetite for risk assets. While investors had expected a rate cut from the US central bank, there was some back-and-forth over whether the cut would be 25 basis points (a quarter of a percentage point) or 50 basis points (half a percentage point).
The Fed ended up cutting its policy rate by 50 basis points (0.5%) to 4.75%-5.00%. This is the first rate cut in about four years. As a reminder, the Fed under Chairman Jerome Powell began raising rates to address inflation stemming from the COVID-19 pandemic when a confluence of supply chain disruptions, labor shortages, and stimulus spending caused inflation to surge.
Looking ahead, the Fed signaled that further cuts are possible in 2024/25. Taken together, the announcement and outlook provided a breath of fresh air and a clearer view of the Fed's monetary policy stance, which the market has been waiting for with bated breath. If there's one thing the market doesn't like, it's uncertainty.
The determining factor in a stock's value is the sum of its future cash flows discounted to today. The result of lower interest rates, all else being equal, is a higher stock valuation. This is especially true for higher-growth stocks, such as those in the technology sector, where the current value depends more on cash flows that will be generated many years down the road.
As a reminder, a software update on the company’s Falcon platform was to blame for a global outage in July 2024 that cancelled flights, made hospital appointments disappear, and prevented TV presenters from going on air to talk about the outage. Shares fell precipitously afterward, as the market debated whether the flawed update and assured outage would cause irreparable damage to the company and its brand. So far, it appears the damage has been limited. Still, the market is trying to figure out the right price for this asset, which is a leader in its space, growing rapidly, and profitable, but not immune to setbacks.
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What does the market tell us?
CrowdStrike stock is highly volatile, with 14 moves of more than 5% over the past year. Against this backdrop, today's move indicates that the market views this news as significant, but not something that fundamentally changes its perception of the business.
The previous big move we wrote about was 21 days ago, when the stock gained 5.8% following the news that the company announced Q2 results. The quarter itself was strong, with ARR (annual recurring revenue), revenue, and operating profit all beating expectations. With the stock dropping from nearly $380 in mid-July to $265 due to the massive outage from a faulty CrowdStrike Falcon update on Windows machines that wreaked havoc on airlines, hospitals, and other important parts of the global economy, the market was fearful that the numbers could look pretty bad in the near term. Interestingly, the company did provide positive updates. These include 1) Multiple major deals (7-, 8-, and even a 9-figure deal) closed following the incident; 2) Gross retention rates over the past 5 weeks are up year-over-year; and 3) CNAPP (cloud native application protection platform), SIEM (security information and event management), and identity modules collectively exceeded $1 billion in ARR.
However, the forecasts were not very encouraging, with annual revenues down and revenue forecasts for the next quarter falling short of Wall Street estimates. However, this seems “better than feared.” These results show that while supply disruption has its drawbacks, they are not so bad (for the moment).
CrowdStrike is up 14.8% since the beginning of the year, but at $283.82 per share it is still trading 27.6% below its 52-week high of $392.15 set in June 2024. Investors who bought $1,000 worth of CrowdStrike shares 5 years ago would now be looking at an investment worth $4,119.
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