The market seems so sure about what will happen in the next few quarters that the volatility index (VIX) has remained near 2018 levels for most of 2024. However, uncertainty often creeps up in certain stocks, and what’s more volatile today than the technology sector?
After stellar runs in stocks dealing with artificial intelligence, like NVIDIA Co. (NASDAQ: NVDA) and others, any news that discredits an otherwise bright and perfect future could send a stock crashing down instantly. That is the case with CrowdStrike Holdings Inc. (NASDAQ: CRWD), as a recent incident has caused its shares to plummet by over 20% in the past few trading days.
The reason behind the price action is a bug that acted up within the company’s systems, causing a global shutdown in global services that relied on the company. For example, New York’s Times Square experienced blacked-out digital billboards, and airlines had to cancel hundreds of flights due to system shutdowns. Despite this recent fiasco, it looks like markets are still willing to bet in favor of a recovery and outperformance this year.
Why Event-Driven Discounts Are a Smart Move for Investors
As long as an event-driven discount doesn't mean that the company is forever changed or going bust, these events often create short-term discounts that many miss out on because of fear. However, many others in the market do come in to squeeze the opportunity before it is corrected.
One example is Warren Buffett's purchase of American Express (NYSE: AXP) after the company suffered fraud in the 1963 salad oil scandal. Knowing that this fraud had nothing to do with American Express's core operations and had no effect on the company's brand and market penetration worldwide, it was an easy buy for Buffett.
CrowdStrike may have just gone through its own version of this scandal. The good news is that a fix is nearly implemented, so the crisis has been averted to send CrowdStrike to business as usual. This is good news for the over 29,000 subscription-based customers who rely on the company for their cybersecurity needs.
Among these customers are electric vehicle giant Tesla Inc. (NASDAQ: TSLA) and software behemoth Microsoft Co. (NASDAQ: MSFT). This is sort of when Buffett realized that many giants were reliant on American Express, increasing the odds of the storm passing by sooner rather than later.
Markets Stick by CrowdStrike Stock Amid Volatility
Outside of price action, which has seen double-digit selloffs in the past couple of days, there are other metrics investors can use to decrypt how the market really feels about CrowdStrike stock moving forward. The good news is that these metrics haven’t changed.
Investors have two main ways to gauge a stock’s potential future. The first is by checking the forecasts for earnings per share (EPS) growth. In the case of CrowdStrike, Wall Street analysts still expect to see EPS growth of 55.6% in the next 12 months.
This compares to peers like Datadog Inc. (NASDAQ: DDOG) and its 25% EPS projections or Zscaler Inc. (NASDAQ: ZS) and its expected contraction in EPS for next year. CrowdStrike’s forecast is even above Fortinet Inc. (NASDAQ: FTNT), and its forecast is for 9.5% EPS growth in that name.
Moving onto the second metric, investors should check how markets feel about these forecasts through the forward price-to-earnings (Forward P/E) ratio. Checking for a premium is key, as markets will typically pay more for a stock that they believe will be a winner.
Knowing this, investors will be pleased to see CrowdStrike trade at a 55.0x forward P/E multiple. This valuation commands a premium of 81% over Fortinet’s 30.3x multiple (a closer comparable based on size). But, there is one more metric investors should consider, particularly for software companies.
That metric is the price-to-book (P/B) ratio. CrowdStrike stands out again, trading at massive premiums above the entire computer sector. A 31.6x valuation means CrowdStrike is trading nearly three times the 6.9x valuation for the rest of the peer group, so markets still have faith in the stock recovering.
Analysts at Canaccord Genuity Group recently reiterated their buy rating for the week, which is a trading day after the bug incident. Their price target is $405 a share for CrowdStrike stock, daring it to rally back and deliver a 53.1% run from where it has sold off to today.
