Warren Buffett is famous as a value investor. While CrowdStrike (NASDAQ:CRWD) might be considered expensive based on its price-to-earnings (P/E) ratio compared to the cybersecurity industry, it’s selling at much cheaper valuations compared to historically right now. That’s since it installed a faulty update, causing 8.5 million of its customers’ devices to crash.
Disaster spells opportunity
On July 19th, a global news story broke that CrowdStrike had unintentionally caused Windows devices to fail as a result of a faulty sensor update. While it quickly worked to resolve the issue, significant disruptions and hundreds of millions of pounds of damages were caused to affected businesses and industries. The share price has tanked 40% following the incident.
Now, some investors are saying that the company has destroyed its reputation forever. The claim is that CrowdStrike may face class action lawsuits, regulatory fines, and the worst part, a significant loss of customers and reputation. As a result, the P/E ratio has contracted from 130 as a 10-year median to 68 as I write.
This might sound worrying at first glance, but some of the most successful investors in history are contrarians. They like to capitalise on the fear of others. As Buffett famously said, “Be fearful when others are greedy, and greedy when others are fearful”.
How much growth could I achieve?
I believe CrowdStrike investors who bought the shares just prior to the crash are not in a good position now. Alternatively, I think if I buy the shares now, post-crash, I could be in for very strong 12-month returns.
The analyst consensus is currently that the investment could grow upwards of 50% in price by this time next year. I’m slightly less optimistic, as I think some downward momentum and lower sentiment could last longer.
It might take some time for the market to favour the company again. However, in my opinion, CrowdStrike is too important to the technology ecosystem’s security to be knocked down for good.
One more error, and that’s it
Despite my optimism, bearish investors are correct to state that if the business has another major crisis then it will be difficult for it to recover. Management is already walking on eggshells after this major outage. So, I need to make sure I own the shares as part of a diversified portfolio if I do invest. This will help to mitigate my risk.
Also, as CrowdStrike is still selling at a high valuation even post-crash, there’s still some uncertainty about whether the stock can recover to all-time highs. There’s a possibility that the prior valuation was too optimistic. This major event may have recalibrated the shares back down to reality. If this is the case, the investment might not be a long-term winner any more after all.
Courage is paramount in investing
Investing in the stock market is never risk-free. The important thing is to perform the right research and then have the courage to follow through and allocate money with conviction.
I think owning CrowdStrike as 5% of my portfolio and buying right now could be a shrewd move. Therefore, I’m potentially investing in it at the beginning of August.
This post was originally published on Motley Fool
