Purchasing stocks when a company is experiencing negative news might initially appear to be an unwise decision. Why would anyone invest in a company that’s currently encountering difficulties?
However, it’s crucial to evaluate the news thoroughly. If a company is facing challenges but has a promising long-term trajectory, this could be an excellent opportunity to buy shares at a more attractive price.
At present, two technology companies that fit this scenario are CrowdStrike (2.34%) and Super Micro Computer (7.92%). CrowdStrike recently dealt with a substantial IT outage, caused by a faulty software update in July, marking the largest of its kind globally. Meanwhile, Supermicro faced scrutiny when a short-seller released a report alleging issues within the company a few weeks ago.
Let’s delve into each of these companies to determine which presents the more compelling investment opportunity following their recent setbacks.
Contents
CrowdStrike: A Closer Examination
CrowdStrike is a dominant force in the cybersecurity sector. This dominance contributes to the severe impact of their recent outage, as numerous businesses and organizations depend on CrowdStrike’s platform. The incident disrupted operations at various hospitals, airports, and companies. Although CrowdStrike managed to deploy a corrective update within an hour, some clients continued to experience repercussions for weeks.
Nevertheless, there is a silver lining. Firstly, the outage wasn’t due to a security breach and didn’t compromise CrowdStrike’s fundamental capabilities. Secondly, the company responded swiftly to rectify the issue.
In its latest earnings report, CrowdStrike outlined the measures it has implemented to prevent future occurrences. Furthermore, the company reports that most clients have remained loyal, and its deal pipeline remains robust.
CrowdStrike’s leadership in the industry is further underscored by its AI-driven platform, Falcon — a lightweight solution that collects data to identify potential threats. The platform includes 28 modules that clients can easily integrate based on their requirements.
This business model has fueled impressive financial growth for CrowdStrike. In the recent quarter, the company’s annual recurring revenue surged by 32% to $3.8 billion. Additionally, GAAP net income increased more than fivefold year over year, while both operating and free cash flow hit record levels.
Thus, despite the challenges posed by the IT outage, the company’s strong long-term prospects remain unchanged.
Supermicro: An Assessment
In recent years, Supermicro’s stock has soared, even surpassing the performance of market favorite Nvidia by gaining 188% in the first half of the year. This surge is largely due to the company’s substantial earnings growth driven by sales to AI clients developing their data centers. Supermicro provides a comprehensive range of products, from servers to full rack-scale solutions.
In light of its robust stock performance, Supermicro announced a stock split to lower its per-share price, making it more accessible to a wider range of investors. This is scheduled for October 1.
However, the release of a critical short report has negatively impacted this tech giant. Hindenburg Research issued a report accusing Supermicro of “accounting red flags” and “export control failures.” This report coincided with Supermicro’s delay in filing its 10-K annual report, leading to a more than 20% drop in the stock since the end of August.
It’s crucial to note that Hindenburg has a vested interest in Supermicro’s decline due to its short position on the stock. Supermicro has refuted the report’s claims, labeling them as “false or inaccurate.” Regarding the delay in the 10-K filing, Supermicro does not anticipate any significant alterations to its quarterly or annual results.
I believe these issues won’t derail Supermicro’s long-term narrative. The company has achieved growth five times faster than its industry in recent quarters, partly by collaborating closely with top chip designers to swiftly incorporate their innovations into its products. The expanding AI market is likely to sustain Supermicro’s growth momentum.
CrowdStrike or Supermicro: Which to Choose?
Both companies appear well-positioned to overcome their current challenges and thrive in the long run, making them attractive long-term investments. Their recent price drops have led to lower valuations, offering better deals than a few months ago.
However, while CrowdStrike’s valuation is fair, it isn’t exactly a bargain at present. In contrast, Supermicro is trading at approximately 12 times forward earnings estimates, compared to CrowdStrike’s 68 times. Consequently, for investors willing to accept some risk, Supermicro emerges as the more favorable option for a “bad-news” buy.
Don’t Miss This Second Chance at a Potentially Lucrative Opportunity
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