Why are CrowdStrike (CRWD) shares rising so much today?

What happened:

Shares of cybersecurity company CrowdStrike (NASDAQ:CRWD) rose 5.9% in morning trading as markets recovered from an initially muted reaction to the Fed's rate cut that sparked renewed demand for risky assets. While investors expected a rate cut from the U.S. central bank, there was some back-and-forth over whether the cut would be 25 basis points (a quarter of a percent) or 50 basis points (half a percent).

The Fed ultimately cut its benchmark interest rate by 50 basis points (0.5%) to 4.75%-5.00%, the first rate cut in about four years. As a reminder, the Fed – under Chairman Jerome Powell – began raising rates to combat inflation resulting from the COVID-19 pandemic when a confluence of supply chain disruptions, labor shortages and stimulus spending pushed up inflation.

Looking ahead, the Fed signaled that further cuts are possible in 2024/25. All in all, the announcement and outlook provided a breath of fresh air and a clearer view of the Fed's monetary policy stance that the market had been waiting for with bated breath. If there is one thing the market does not like, it is uncertainty.

The value of a stock is determined by the sum of its future cash flows discounted to today. Lower interest rates lead to higher stock valuations, all other things being equal. This is especially true for high-growth stocks such as those in the technology sector, where current value is more dependent on cash flows many years in the future.

As a reminder, a software update on the company's Falcon platform was the cause of a global outage in July 2024 that canceled flights, made hospital appointments disappear, and prevented television stations from going on air to talk about the outage. The stock fell steeply afterward as the market debated whether the faulty update and ensuing outage would cause irreparable damage to the company and its brand. So far, the damage seems limited. Still, the market is trying to find the right price for this asset that is a leader in its field, growing fast and profitable, but is not immune to hiccups.

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What does the market tell us:

CrowdStrike shares are highly volatile, having experienced 14 price swings of over 5% in the last year. With that in mind, today's price action suggests that while the market considers this news significant, it does not view it as something that would fundamentally change its perception of the company.

The last major move we reported on was 21 days ago, when the stock gained 5.8% after the company announced second-quarter results. The quarter itself was solid, with annual recurring revenue (ARR), revenue, and operating profit all beating. When the stock fell from nearly $380 in mid-July to $265 due to the massive outage caused by a faulty CrowdStrike Falcon update on Windows machines that wreaked havoc on airlines, hospitals, and other key parts of the global economy, the market feared that the numbers could look pretty bad in the near future. Interestingly, the company delivered positive news. This includes 1) several large deals (7-, 8-, and even a 9-figure deal) being closed following the incident; 2) gross retention rates over the past 5 weeks increasing year-over-year; and 3) the CNAPP (Cloud-Native Application Protection Platform), SIEM (Security Information and Event Management) and identity modules combined exceeded $1 billion in ARR.

The story continues

However, forecasts were disappointing, with annual revenues being cut and next quarter's revenue forecast coming in below Wall Street estimates. However, this seems better than feared. These results prove that while the outage brings headwinds, they are not that bad (for now).

CrowdStrike is up 14.8% year-to-date, 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 stock 5 years ago would be looking at an investment worth $4,119 today.

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