Before and After CrowdStrike Meltdown

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CrowdStrike shares are experiencing their most significant drop since 2022, and the outage could be their most severe yet.

CrowdStrike (CRWD.US) experienced a significant drop of more than 15% on Friday, marking its largest decline in almost two years following a major outage linked to the cybersecurity company that disrupted computers worldwide using Microsoft (MSFT.US) software. The stock initially fell by as much as 15.4% before partially recovering to close 11.1% lower at $304.96, marking its worst one-day performance in about 19 months.

The widespread outage, which affected Microsoft-powered computers, disrupted flights and impacted various industries, such as banks, publishers, and numerous other companies globally. Both governments and airlines attributed the outages to CrowdStrike. Security expert Troy Hunt described the outage as historically significant, stating that it may be the largest IT outage in history.

 During the stock decline, shares of cybersecurity competitor Palo Alto Networks (PANW.US) increased by 2.2% on Friday, indicating a contrasting performance in the market.

Analysts from Wedbush Securities and William Blair expressed concerns about the impact of the outage on CrowdStrike's reputation and future business opportunities. CrowdStrike CEO George Kurtz affirmed that the issue was not a security incident or cyberattack, but rather a defect in a single content update for Windows hosts. He mentioned that Mac and Linux hosts were not impacted, and the issue had been identified and isolated, and a fix had been deployed.

William Blair analysts noted that companies may face difficulties in resolving the issue due to affected machines undergoing a rolling reboot, which requires manual intervention since remote patching is not possible during the rebooting process.

The decline in CrowdStrike's shares continued over the course of four sessions, with the stock falling by approximately 20%. Redburn analyst Nina Marques expressed concern about the potential implications of the situation on CrowdStrike's business and market share. CrowdStrike's stock had already faced a 3.4% decrease the day before, following a downgrade to "sell" by Redburn Atlantic.

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Before we delve into the details, what is CrowdStrike, and why can it lead to global computer spam? Let’s go to the next section. 👇️ 

What is CrowdStrike

CrowdStrike, an online security solutions company with an 18% share of the endpoint detection and response (EDR) software market, said in a statement that affected systems may need to be rebooted up to 15 times in response to the global outage.

On Friday, July 19th, a massive global outage occurred in Microsoft systems, disrupting markets and causing operational problems for many companies. CrowdStrike, the main culprit behind it, has been drawing attention.

Reports say that a problem with an update to the CrowdStrike Falcon version caused computer systems worldwide to crash last July 19th.

On Friday local time, US stocks initially traded down, with $CrowdStrike Holdings A (CRWD.US)$ shares dropping sharply by 14% at one point before closing down 11.10%.

So, which company was the main culprit behind this "global system outage"? Why was Microsoft involved and did such damage occur?

CrowdStrike is a cloud-based endpoint protection platform company founded in 2011. Its flagship product, the Falcon platform, leverages artificial intelligence and machine learning technology to detect, prevent, and respond to network threats. CrowdStrike's ability to detect and prevent sophisticated network attacks has earned it the trust of some of the largest cloud service providers, including Microsoft and Amazon AWS, as well as leading global banks, healthcare insurance, and energy companies.

The company's software is renowned for its ability to detect and prevent advanced network attacks and is used by the largest cloud service providers, Microsoft and Amazon AWS, as well as global banks, healthcare insurance and energy companies.

According to IDC, CrowdStrike has about 18% of the $8.6 billion endpoint detection and response (EDR) software market, making it the second-largest after Microsoft.

What caused CrowdStrike to cause a blue screen, and why did Microsoft get involved?

CrowdStrike software is different from older, more limited versions of security software. Traditional antivirus software was effective in the early days of computing and the Internet because it could catch the signs of known malicious software. However, as attacks have become more sophisticated, this software is no longer acceptable.

CrowdStrike's "Endpoint Detection and Response (EDR)" software is said to be more effective than traditional antivirus software. However, it is important to note that this software and other network security products require deeper access to the computer's operating system, which can pose a risk to the very system they are trying to secure.

Microsoft and CrowdStrike are competitors and offer similar "endpoint" network security products. CrowdStrike's Falcon platform is integrated into Microsoft security products, including Microsoft Azure and Microsoft 365, to enhance overall network security.

According to reports, yesterday's incident was caused by an error in the way CrowdStrike released a software code update and how it interacted with Windows systems, causing a large number of users to experience blue screen errors.

CrowdStrike co-founder and CEO George Kurtz acknowledged the issue, stating: "CrowdStrike is actively working with affected customers to resolve the issue as it turns out the single content update detected on a Windows host was flawed. Mac and Linux hosts are not affected. This is not a security event or network attack."

How disruptive is CrowdStrike?

CrowdStrike's faulty software update caused multiple outages for customers in the airline, bank, health, and retail industries and impacted ports, corporations, and governments. Hospitals were forced to postpone surgeries, and outages also occurred at McDonald's, UPS, and FedEx. Employees at banks, including Nomura Holdings, JP Morgan Chase, and Bank of America, could not log into their internal systems on Friday.

For airlines, the outage disrupted communication with planes and ground control systems, impacting travel. According to FlightAware, more than 21,000 flights were delayed worldwide. So far, US, Delta, American, Lufthansa, Air France, and Ryanair have made progress in restoring service, but progress is slow.

Cybersecurity experts say CrowdStrike's technology is an effective defense against ransomware. However, because of its cost (which can exceed $50 per machine in some cases), most companies don't install it on all their computers. The computers that have the software installed are the ones most in need of protection: Any serious outages would take down vital services.

CrowdStrike itself has stated that "due to its leadership position in the operating systems and productivity software markets, the company has vulnerabilities that could have potentially disruptive effects."

According to information reportedly cited from communications between CrowdStrike and one customer, CrowdStrike's technical support team suggested that affected systems may need to be rebooted up to 15 times.

Who will pay for the economic losses and damages remains to be seen. Many software providers are not legally liable for damages caused by licensed programs, so if they have service agreements with their largest customers, they may be required to offer remedies, discounts, or other compensation.

CrowdStrike is working with all affected customers to ensure that their systems operate typically and that we can provide the expected service.

It is also worth noting that an incident involving Microsoft Azure cloud services is causing disruptions. While Microsoft has said it has resolved the underlying issue, users may continue to feel "residual effects."

It is unknown whether the computer system crashes were caused by flaws in CrowdStrike software updates or by problems with Microsoft's online services and enterprise cloud-computing service Azure that began on Thursday.

However, a Microsoft spokesperson said the company doesn't believe flaws in CrowdStrike software are related to the disruptions for "some Azure customers."

Additionally, it is worth noting that another incident involving Microsoft Azure cloud services is causing service disruptions, and while Microsoft has said it has resolved the underlying issue, users may continue to feel "residual effects."

According to the analysis, it is still unclear whether the computer system crashes were caused by a flaw in a CrowdStrike software update and issues with Microsoft's online services and enterprise cloud computing service Azure that began on Thursday.

A Microsoft spokesperson said the company doesn't believe flaws in CrowdStrike software are related to the disruptions to "some Azure customers."

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However, this is not even the interesting part yet. CrowdStrike insiders sold shares ahead of the outage. Here's How It Happened 👇️ 

CrowdStrike Insiders Sold Shares Ahead of the Outage: Here's How It Happened

Shares of CrowdStrike Holdings Inc. (CRWD.US) plummeted after it was revealed that a faulty software update had caused computer issues and temporary disruptions on Windows systems. Before this drop, two company insiders, including the chief security officer, had sold millions of dollars worth of stock a few days earlier through pre-arranged 10b5-1 plans. These plans prevent individuals from profiting from nonpublic information by automatically executing stock transactions based on preset parameters such as price and volume.

Despite the 11% drop in share price triggered by the software update issue, the company's stock is still up 19% for the year. Recognizing the significance of the drop, it’s important to note that these planned stock transactions were established over a year ago. The surge in share price likely led to the sell-off in trading plans. CrowdStrike's stock has grown significantly since its initial public offering in 2019 at $34 per share, reaching an all-time high of $398.33 on July 9, 2024.

Director Sameer Gandhi sold 15,000 CrowdStrike shares on July 1 at an average price of $380.21 through a 10b5-1 plan adopted on June 29, 2023. Meanwhile, Shawn Henry, Chief Security Officer of CrowdStrike, executed a structured transaction on July 15, selling 4,000 shares at an average price of $371.32. Both individuals regularly sell CrowdStrike shares through structured transactions. Gandhi is a partner at Accel, a venture capital firm that invested in CrowdStrike before its IPO and owns significant holdings in the company. At the same time, Henry holds 183,090 shares of CrowdStrike stock.

This information was obtained from a feature in Barron's called Inside Scoop. It covers stock transactions by insiders who are required to disclose their trading activities to regulatory groups such as the Securities and Exchange Commission.

Interesting coincidence? Share your thoughts in the comment section below.

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But hey, we can still find some good news during this outage. It's shopping time! Let’s check out the next section 👇️ 

Due to the global outage, stock prices plummeted. However, "Wood Sister" made a safe bet by purchasing CrowdStrike!

On Thursday, ARK Investment purchased approximately $13.24 million worth of CrowdStrike shares through its ARKW and ARKF ETFs. Despite a global IT system failure causing market turmoil and a more than 11% decline in CrowdStrike's security company, the ARK ETF, managed by Cathie Wood, increased its holdings of CrowdStrike.

On July 19th, ARK Investment, through its subsidiaries ARKW ETF and ARKF ETF, bought back CrowdStrike shares for approximately $13.24 million (38,595 shares). Additionally, ARK also acquired shares in the software development platform GitLab Inc, purchasing 38,519 shares worth nearly $20 million through the ARKW ETF.

In terms of divestitures, ARK continued to sell its Coinbase shares and sold an additional stake in Tesla worth nearly $13.2 million after the Thursday sell-off. Notably, the global IT outage has caused some of Tesla's production lines to be shut down, and it is uncertain when employees will be able to return.

However, Musk's stance differed from that of Cathie Wood. He said he had already removed CrowdStrike from all of his systems—CrowdStrike hadn't even released a new version—and warned that the IT outage would "bring the automotive supply chain to a standstill."

Analysts' attitudes are mixed. Dan Ives, an analyst at Wedbush Securities, said:

According to her analysts, they don't expect competitors to gain market share. "Although it might initially unsettle customers, we believe the company has acknowledged the issue and is responding promptly and appropriately," stated an analyst from JPMorgan Chase.

Ben Bernstein, a former security investor at Gusto, an early-stage security startup, said he plans to continue using CrowdStrike.

ARK also made some changes to its investment portfolio, selling shares in Uipath Inc. and purchasing shares in Oklo Inc. Additionally, over the past week, ARK increased its holdings in Oklo Inc., which indicates a shift in the company's investment strategy.

That’s it for this episode!

Is this a buying opportunity or time to run away for good? Share your thoughts in the comment section below.

If you missed our CrowdStrike episode, go ahead and check it out!

Remember: Investing is a journey, not a destination. It's about making informed decisions, managing risk, and staying committed to your long-term goals. So, take the time to research, experiment, and find the perfect recipe for your balanced portfolio.

If you want to learn and strengthen your investment portfolio, we have 9 steps to help you avoid an investment meltdown. Check out the 9-part series here. 👇️ 

Cheers to wealth, wisdom, and a dash of madness!

The Investing Wise Academy Team

Disclaimer: This newsletter is for informational purposes only and should not be considered financial advice. Please consult with a financial advisor before making any investment decisions.

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