U.S. Regulators Target CrowdStrike: Is It a Signal or Noise?

Key Points

• CrowdStrike faces a regulatory probe involving a $32 million transaction with Carahsoft, raising questions about the potential impact of financial irregularities.
• The company recently announced global workforce cuts of 5%, amid strong financial projections, including expected revenue of $4.74 to $4.81 billion for the year.
• Despite short-term challenges, CrowdStrike remains well-regarded by analysts and is poised to benefit from the growing cybersecurity industry projected to reach $24 trillion by 2027.

On May 9, CrowdStrike Holdings Inc. NASDAQ: CRWD closed the week down about 7%. A key reason for the sell-off was news that the company was part of a Department of Justice (DOJ) and Securities & Exchange Commission (SEC) probe involving the company’s $32 million deal with Carahsoft.

This may seem like bad form to bring up when the stock has made up that loss. All technology stocks are ripping higher on the positive trade news between the United States and China.

But after this initial euphoria is over, the regulatory probe will still be there. The question for current and potential shareholders is whether the probe is a signal of a possible correction or just noise that investors should discard.

Signal or Noise? You Decide

The issue seems straightforward. Carahsoft provides information technology (IT) solutions for the U.S. government, specifically for the Internal Revenue Service (IRS). The $32 million is for products the IRS never bought.

Investigators from the DOJ and SEC are trying to ensure the transaction was properly accounted for. Both CrowdStrike and Carahsoft stand by the transaction's legality, which would seem to be easy enough to resolve.

However, when regulators get involved, it usually isn’t that simple. As investors have seen on a number of occasions, nothing can turn bulls into bears quite like reports of financial irregularities.

It’s too early to determine if that’s the case here. However, investigators are asking the “What did you know and when did you know it?” questions that suggest this could take some time to resolve. One concerning item is that the DOJ and SEC investigations look broader than just the Carahsoft transaction.

"The fact remains we stand by the accounting of the transaction," says CrowdStrike spokesperson Kevin Benacci.

A Company is Different Than Its Stock

Investors can always find some reasons not to own a stock. For example, another reason CRWD stock faced some headwinds last week was its announcement that it was cutting about 5% of its global workforce.

Most investors understand that layoffs are about efficiency, but in the short term, many traders sought profit. That can cause many investors to question whether their thesis for owning the stock is wrong.

There’s still a lot to like about CrowdStrike. Remember that the company recently reaffirmed its full-year revenue guidance of between $4.74 and $4.81 billion. The cuts will only increase efficiency, which should benefit the company’s bottom line.

Investors will learn more about that in June. For now, it’s important to remember that companies are willing to continue spending on cybersecurity, which is projected to become a $24 trillion industry by 2027.

CrowdStrike is capturing a significant amount of this business. It sports one of the highest operating margins in the sector. That's reflected in its five-year total return over the last five years, which is 466.5%, over four times that of the S&P 500 over the same period.

Plus, while CRWD stock is trading above the consensus average of the analysts tracked by MarketBeat, it’s still loved by analysts. In fact, on May 8, as the stock was falling, Rosenblatt Securities reiterated its Buy rating and $450 price target for the stock.

The Options Chain Suggests Volatility Ahead of Earnings

CrowdStrike reports earnings on June 3. The CrowdStrike Options Chain on MarketBeat provides interesting insight on investor sentiment. An equal number of calls and puts (38) have been purchased for June 6.

The strike price on the call option is $500, which would be an all-time high; the strike price for the put option is $380, which would retrace to a low around February 27. Of course, traders can let these options expire worthless, but it does suggest that they believe there could be significant volatility in CRWD stock.