CrowdStrike Holdings' financial outlook for the near term has encountered a degree of uncertainty following a widespread technology outage that occurred last Friday. Nevertheless, according to an analysis by Morgan Stanley released on Monday, the cybersecurity firm is likely to manage and mitigate any long-term reputational damage effectively. The issue arose late last week due to an update CrowdStrike issued for its Falcon sensors, which affected Microsoft Windows systems.
The company promptly addressed the situation, announcing on Friday that the problem had been isolated and a resolution was deployed. Importantly, the update did not impact users on Mac or Linux platforms, and CrowdStrike clarified that the incident was not the result of a cyberattack. In a Monday update shared via its website, CrowdStrike noted, "Together with our customers, we have tested a new method to expedite remediation of affected systems.
We are currently in the process of operationalizing an opt-in to this technique." On Saturday, Microsoft reported that the CrowdStrike update had affected nearly 8.5 million Windows devices, which accounts for less than one percent of the total Windows machines globally. Morgan Stanley pointed out the uniqueness and magnitude of this outage, characterizing it as one of the largest in technological history, significantly affecting numerous sectors, including airlines, banking, and healthcare organizations.
The analyst noted that while outages originating from software-as-a-service vendors are not uncommon, the scale of this particular event was noteworthy. In terms of contractual obligations, CrowdStrike may face concessions or credits due to its inability to fulfill uptime commitments as stipulated in its service-level agreements.
However, Morgan Stanley believes the company will likely not be liable for any broader economic damages resulting from this incident. From an analytical standpoint, Morgan Stanley has estimated that this event may hinder CrowdStrike's annual recurring revenue (ARR) by roughly 1.4%—and potentially 2% when factoring in additional discounts and impacts on the sales cycle.
Consequently, the firm has reduced its full-year ARR outlook for CrowdStrike by about 2% and anticipates a decrease of 1% in the total revenue estimates. Further projections by Morgan Stanley indicate a 5% headwind impacting the company's net new ARR for the second quarter, predicting this metric to reach $209 million, marking a 6% year-over-year increase, yet falling short of Wall Street’s anticipations of an 11% rise.
Looking ahead, the firm expects net new ARR for the second half of the year to witness a double-digit decline annually, with a forecasted decrease of 15% in the third quarter and 6% in the fourth quarter, as contract negotiations are pushed towards later in the year. In response to these developments, Morgan Stanley has lowered its price target for CrowdStrike stock from $422 to $396 while maintaining an overweight rating.
Following these revelations, CrowdStrike shares experienced a significant drop of 13% on Monday afternoon trading, compounding an 11% decline from the previous Friday. "We anticipate some volatility in the upcoming quarters as organizations work to stabilize their operations in light of these issues," noted Morgan Stanley.
"However, we are optimistic that any reputational harm will be limited thanks to a rapid response from CrowdStrike and the positive initial feedback from customers and partners." Furthermore, the firm maintains a bullish long-term view, projecting that CrowdStrike’s ARR will more than double to $10 billion, while free cash flow per share is set to approach $14 by 2028.
Morgan Stanley also highlighted that the forthcoming analyst day, scheduled for September, is expected to provide more clarity regarding the company’s mid- to long-term strategic positioning. Morgan Stanley concluded its analysis by stating, "Although this outage poses challenges, we believe that a reliance on a singular operating system and cloud vendor is not the most viable solution; instead, a diversified approach among vendors is essential for resilience in operations.".