The Ripple Effects of the Crowdstrike Outage and Counting Down to a Big Week of Earnings 7/19/24

0:01Live from the Nasdaq market site in the heart of New York City's Times Square this is fast money Here's what's on tap tonight. Cyber shock. Shares of CrowdStrike plunging as the company finds itself at the heart of a massive global tech outage. What it means for the software stock, its competitors and the U.S.'s tech security infrastructure. And Alphabet and Tesla and Chipotle. Oh, my. Earnings season kicks into high gear next week. And we're diving into the options pits to bring you the trades on all of these stocks. Plus, Starbucks catches the eye of one activist investor. Bitcoin clocks in its best week since March, and volatility hits a nearly three-month high in what was a very eventful week in the markets.

0:39I'm Melissa Lee coming to you live from Studio Viet, the NASDAQ. On the desk tonight, Tim Seymour, Courtney Garcia, Bono & Eisen, and Mike Coe. And we start off with the tech outage that sent shares of CrowdStrike plunging as much as 15 % today. A glitch in the rollout of a software update roiled operations across industries. Airlines grounded or canceled flights. banks, and health care services were disrupted, and TV broadcasts went offline. Oh, my gosh. Oh, my gosh. The world is in it. But seriously, IT experts calling it, quote, the largest IT outage in history. CNBC's Steve Kovacs got the very latest.

1:11Hey, Steve. Hey, Mel. Yeah, here's where we're at so far. Issue with cybersecurity from CrowdStrike, of course, pushing out that buggy update overnight and causing Windows PCs using the software to crash. Now, to be clear here, this was not a hack and not a cyber attack. CrowdStrike just pushed out that buggy update that caused the outage and a fix has since been deployed. And we've already seen many of systems throughout the day start to recover. CrowdStrike CEO George Hertz apologized for the outage earlier this morning on Squawk on the Street. I want to personally apologize to every organization, every group and every person who's been impacted by this.

1:50Now, guys, it's unclear when everything's going to come back online. Kurtz also told us that not everyone's system is going to fix itself automatically with this update. Many are going to need an IT pro to come over and manually remove that buggy software from each machine. In the meantime, shares of rival cybersecurity names like Sentinel One and Palo Alto Networks rose today on the news. But shares of CrowdStrike, they closed down 11 percent. And we're still waiting for more updates from both CrowdStrike and Microsoft about when everything is expected to be functional and back online. But after that, guys, it's going to be the investigation time.

2:27Figure out what went wrong and what to do about it next. All right, Steve, thank you, Steve Kovac. So what does CrowdStrike's issue mean for its stock longer term and for the rest of the cybersecurity space? Let's bring in Wells Fargo senior research analyst Andrew Nowinski. Andrew, great to have you with us. The stock dropped by$74 billion in market cap today. How do you start thinking about the longer-term impacts on CrowdStrike, whether it be reputational hits, the ability of companies to switch cybersecurity providers, and also the liability issues the stock might face? Thank you for having me on again, Melissa.

3:03It's great to see you. So the financial impact really depends on customer churn, and I'd say that's predicated on the recovery. As Steve noted, this is a very manual process to recover from. But if they remain, if companies remain down throughout the rest of the weekend and they're not back up and running by Monday, I think they'll be looking, a lot of those companies will be looking for a new solution going forward. Now, for those customers that are new to CrowdStrike and those that are maybe back up and running already, they'll have to ask, you know, is there a better alternative to CrowdStrike?

3:38Now, the security efficacy of CrowdStrike is still better than every other solution on the market. Security efficacy was not impacted by this outage. Now, if it was a cyber attack that penetrated CrowdStrike, it's game over. But this was a self-inflicted, very fixable problem. So I think the primary impact you'll see on the stock is extended sales cycles, maybe higher discounting this quarter and next quarter. And you'll see that showing up in their operating margin and their ARR going forward. It sounds like you're willing to look through the impact. I think it's a little bit early to look through.

4:16Like I said, we have to see even by Monday, if everyone's back up and running, I think the customer churn will be limited. If it's longer than that and it's harder to recover, there's a real impact from customer churn. And I think you'll start to see, you know, their growth profile and their operating margin profile negatively impacted going forward. We saw a lot of the other cybersecurity stocks higher. What's your interpretation of that? Is it that perhaps they will gain some business? Is it that any of them are targets for any of the larger players? And do you think some of the larger players will look to do a deal like a Google for Wiz, for instance?

4:56Yeah, that's interesting. So the competition will absolutely use this to their advantage. You know, this was a self-inflicted issue, and they have every right to talk about their own DevOps processes and their own internal testing cycles to try to convince customers that they're more responsible with these code changes that they push out. So they will absolutely use it. I'm sure Sentinel One, Palo Alto being their two primary competitors on the endpoint side and the cloud side, will absolutely be using this going forward. As it relates to some of the hyperscalers potentially acquiring one of those other vendors, there's already the rumors, of course, that they're going to acquire Wiz, but Wiz does not stop breaches.

5:37Wiz provides better visibility in your cloud environment. CrowdStrike and others, and Sentinel-1 and Palo Alto, have the cloud tools called workload protection to actually stop the breach. And that's the piece that's missing still, even if Google were to acquire Wiz. Andrew, it's Tim. Thanks for joining us. You could almost look at the stock chart and say that the stock predicted this was going to happen. I mean, this is a stock that was down substantially. And you can, you know, I think this is where I want you to jump in and talk about the fundamentals for the space, what we're supposed to pay for a company in global security at 15 percent of that market.

6:12But we're at a place where on a trailing basis, this stock is 650 times even after this pullback. Stock is down almost 30 percent from the highs. And again, that was well before today. maybe the group has been trading like this. I'm just curious if you can pinpoint where we really should be focused for CrowdStrike. Is it beyond just the order book and the Fortune 300 that they serve? It's an extraordinary time to be looking at high multiple stocks across the board. That's a fair question, Tim. So valuation on CrowdStrike has always been really expensive. With the pullback today, it's trading at about 14.6 times calendar 25 EV to sales.

6:51It's 11 % cheaper today than it was yesterday, but it's still certainly a very expensive stock. I think you really have to focus on this one that, yes, their growth might be a little bit lower going forward. Yes, their operating margin and their free cash flow might be a little bit lower than we were expecting yesterday, but the trifecta of those three is still best in class. No one has 30 % plus revenue growth, almost a 30 % operating margin in a few years, and a 36 % free cash flow margin. So the combination of those factors still makes CrowdStrike the single best stock to own in the cybersecurity world.

7:29Now, I think a lot of things in terms of the changing competitive dynamics, this incident is really important because it actually does highlight what could happen if this were a cyber attack. Look how many organizations were down today and inaccessible from a simple code patch or content patch that was pushed out. If this were a cyber attack, things to be so much worse. That's why cybersecurity solutions are so important, and they have the best cybersecurity solution in the market. Andrew, great to speak with you. Thank you. Sure thing. Thank you. Andrew Nowinski. Mike Coe, how do you start thinking about the hit to the stock and the entire sector?

8:07Well, I mean, I think as he was just pointing out that you've got a couple of things that we have to see how it plays out. I mean, obviously, we need to see that everything is resolved in the near term, and that is helpful. But the valuations make it difficult help to dip your toe in the water. We did see significant options activity in this thing. It was actually the fifth busiest stock in the S &P 500 from an options perspective today, playing in the same space as Apple and Tesla and Nvidia. And it's obviously a much smaller business, and it's a rich valuation. I think you have to basically wait a couple days before you dip your toe in the water.

8:38It traded about 22 times the average daily put volume. The most active contracts were the 300 strike puts, actually, that expire next week. And the second most active contract were actually the 250 strike puts that expire August regular way. Yeah, I think the good news is this was not a cybersecurity attack, but I think it's also making people realize how important cybersecurity is when you realize how far reaching these attacks are going to be. So I think this kind of goes two ways, where, number one, there's going to be more demand for this when you realize what kind of outreach it needs. But on the flip side, there's a lot of financial repercussions that CrowdStrike really could be implemented with because all of these businesses have outages.

9:14What does that mean on CrowdStrike? Are there going to be lawsuits with this? Is there going to be financial regulations? There's a lot in the short term that I think is going to weigh on them on top of their high valuation, especially with everything going on with higher valuation in the larger, broader economy. So I would say out of this in the short term, I don't think this is ending, at least in the near future. Long term, I mean, I don't think cybersecurity comes here going anywhere, but I don't know if we're at the end of this dip. Imagine you are an individual. You're calling your congressperson.

9:37You're complaining because your flight got canceled, your vacation got canceled, because you couldn't have that procedure that you had scheduled for months because you couldn't pull your money out of the ATM. That's what gets the attention of lawmakers. Absolutely. I mean, there's no way to spin these headlines anything but negative. And according to his point, I really think you have to resist the urge to buy the dip. With that said, and as a previous analyst mentioned, trading out of CrowdSyke into another alternative really is a trade down in performance. And you have to ask yourself, are you willing to open yourself up to more of a possible cyber security attack because of something that happened in the short term?

10:15Now, clearly, I don't see any situation where they do not address what their internal procedures are in terms of rolling out software updates. With that said, like I said, I think the prevailing way to trade this space has been buying the dips. And I do think you have to resist that urge in the short term. With that said, looking out a bit further, I do think you will get an opportunity to buy a name that is top in class at a more attractive price and valuation. And we're going to have our usual markets chat. And but but in advance of that, I'll just say that this is a space where the market's punishing anything like this right now.

10:49And they've been doing it since that CPI number. We'll get into that later in the show. This is the most expensive stock of its cohort by far. And maybe they deserve it again. Fifteen percent of global security. That makes a lot of sense. But when you're trading at 55 times free cash flow or significant, there's there's a whole lot of numbers we could keep throwing out there. They're probably you start to wax over. I think this is a case. the analyst community was already starting to. And as I said, the stock's down 30 percent through today. So it had had a nice head start. In fact, it's traded all the way back down to the 200.

11:19Hasn't traded through the 200 day moving average to the downside since November of 21. We know what was going on there. And there was a backdrop that wasn't necessary what was going on in software and cybersecurity companies. It was more about high multiple companies in a rising rate environment. We may have high multiple companies now and a growth scare. And that's something else to think about. Yeah. You know, Mike, in terms of the economic fallout of all of this, as this thing continues, because it's not over yet, it is interesting that we are sitting in the heart of earnings season. And on those conference calls, I'm sure there are going to be plenty of questions about how this has impacted business so far.

11:54Yeah, I think that's definitely true. We're probably going to get a lot of questions being asked about that. I mean, I think you were just referring to something else, too, which is from the regulatory standpoint. I mean, it wasn't just inconvenienced consumers, we also saw outages affecting government agencies. And that's an even bigger problem and the kind of thing that I think is going to attract even more scrutiny. So I think that's going to create pressure for these guys. I think it's going to create some pressure as well for Microsoft. We did see slightly above average put activity there as well.

12:26I just think anything that sort of shakes one's confidence, whether it is declining earnings growth or whether it's these kinds of outages, we're just in a tough environment for this kind of thing right now. Her next guest says the global IT outage could be a wake-up call for the security industry. Caitlin Chin Rothman is with the Center for Strategic and International Studies. She's a fellow in the Strategic Technologies Program. Caitlin, great to have you with us. It's one thing for Congress to feel pressure. I'm sure there are going to be hearings. CEOs marched up to the Hill. It's another thing for something to actually come of this.

12:57What are your thoughts? Yeah, I mean, Congress is definitely going to want answers from CrowdStrike on how exactly this happened, who is responsible, and what steps they're taking to make sure that this incident does not happen in the future. We've also seen talk from the executive agencies as well. Federal Trade Commission Chair Lena Kahn has suggested that concentration in the cloud computing industry has created single points of failure that could potentially lead to incidents like this. However, we have to remember that in Washington, D.C., regulation moves really slow. So even though there is a lot of initial confusion, a lot of initial outrage over what has happened today, it remains to be seen whether it'll lead to long-term regulatory change.

13:43So ultimately, you think that if anything is to be done, it will be an endeavor taken on probably by private industry? Historically, Congress has left the runnings of technology company to the private sector. It's avoided creating very restrictive regulations in order to promote innovation in cybersecurity, innovation technology. I think that I think it'll be very difficult for Congress to change that path. However, it is still possible that Congress could increase pressure on CEOs, including CrowdStrike, to be responsible for how their products work and how they affect not only the economy, but also society and especially individual voters.

14:26Caitlin, thanks for joining us. And your title and the post you sit at certainly gets to the heart of the matter, strategic technologies. And it may not be about CrowdStrike today. It may be the fact that Microsoft is 74 percent of the operating systems. And what does Washington do to think about how we all just realized we went through the disruptions and where they hit people across the board. But the reality is we've never had more concentration risk in the hand of four or five companies. Does this change anything? It's not going to happen overnight. But again, Microsoft's dominance here. It's great to talk about CrowdStrike, and it is dominant relative to appears in a consolidating industry, but still very early.

15:05Microsoft, nobody's close. Yeah, I think that when it comes to today's incident or even past incidents, for example, the SolarWinds incident back in 2020 really showed that with this one supply chain attack targeted towards a Microsoft update, multiple federal agencies, large companies were affected. So we're really, really seeing that concentration in the technology industry can lead to single points of failure that can lead to massive adages like today. So I think this raises a lot of questions for regulators. First of all, are there or should there be concrete requirements or more responsibilities that technology companies have to take to be responsible to society and to their customers?

15:49And then second, what are the effects of market concentration. Not only does it create these single points of failure and expand risk, but does it also reduce incentives for technology companies to compete and to make sure that bugs like today can never happen again? Caitlin, do you think that the fact that this is sort of a self-inflicted tech outage, I mean, it's the biggest in history, versus a cyber attack, does that change at all the policy response to this issue at all? I mean, to me, it underscores the vulnerability that we have, regardless of what kind of attack or where it came from. I mean, the bad guys are probably looking at this thinking, that's a great way to bring the system down.

16:32Yeah. Yeah. It definitely increases the chaos, I think, the fact that this is self-inflicted. Even with cyber attacks, though, we've still seen Congress and lawmakers look to companies and say, OK, how can you how can you shore up your cyber defenses? How can you make sure that this doesn't happen in the future? So I definitely think that lawmakers are going to take time to look at the facts. And I'm sure we'll see more information emerge in upcoming weeks about how exactly this happened. Was there some sort of failure that could have been avoided? Was there anything that CrowdStrike could have done better to make sure that today's incident, you know, wouldn't have happened?

17:11So I definitely think that depending on the facts of this incident, I'm sure we'll learn more in the future. Lawmakers will be, I think lawmakers will be very, very interested in how CrowdStrike or, I mean, any technology company really can make sure that, I mean, single software updates won't cause global chaos and global disruption in the future. Caitlin, thank you for your time. Appreciate it. Thank you so much for having me. Caitlin Chin Rothman. All right. So it sounds like Congress probably won't be doing much, which may eliminate the overhang of that. But there's also the reputational over.

17:48I mean, Wedbush was putting out this note saying CrowdStrike has just become a household name, but in the worst way possible. Right. And of course, they're supposedly the ones that are there to defend against these exact kind of things. And they've created it. But it wasn't necessarily a hack. It's just. But again, back to Congress. I'm kind of happy that Congress can't do anything about it because I don't want to see, I don't want the government solving innovation and technology for me. It's one of the reasons why this country is so far ahead of the rest of the world. And so this is a problem, though.

18:17It's a problem for the government. It's a problem for an industry that's almost working within itself to determine what standards are. But again, 85 percent of the infrastructure is in the private sector. I think I want to voice an unpopular opinion here and say that. I like when he leads with that, by the way. I know. I'm ready. I'm bristling. Come on. Listen, I think there's a way to view this through a positive lens. We've seen the extent of how bad things can get, and this was not a cybersecurity attack. This was not—there was no malicious intent here. So while I do think CrowdStrike is going to have a tough time in the interim, I think for the space, it underscores that we cannot afford, to your point about hamstringing innovation, we cannot afford to hamstring innovation, particularly in the cybersecurity space, going into an election cycle.

19:02So, in fact, I think once this kind of overhang passes through, I would expect the competitors to trade up on the back of this news. All right. Coming up, Starbucks surging on a report that Elliott Management is throwing up a sizable stake in the coffee giant. Can the activist investor help create a much-needed turnaround? We'll debate that next. Plus, a monster slate of earnings kicking off next week. What the options market is saying ahead of the reports from Tesla, Chipotle, Alphabet, and more. This is Fast Money. With Melissa Lee, right here on CNBC.

19:44Welcome back to Fast Money. Starbucks topping the tape, jumping nearly 7 % on a Wall Street Journal report that the coffee chain has a new activist investor. Elliott Investment Management is set to have built a large position in Starbucks shares, privately pushing change behind the scenes. Even with today's move, the stock is still down 17 % year to date. It seems like there's a lot that can be done potentially, Courtney, to improve this story here. There should be, right? And I do think that they have a lot of issues with kind of just like the macro economy and people being stressed with inflation.

20:15I mean, I don't know what it costs for Starbucks these days, but it is not cheap anymore. Especially Tim as a consumer. My venti with zero frills to it because that's the kind of guy I am is about$4.34. For just drip coffee. It's coffee. And that's the thing is you are a loyal customer. Most of the loyal customers is really like that's where they're getting their business. But it's the occasional customers. That's where they're seeing the steepest traffic decline. I think that's the problem. It's like, how do you bring those people back in with the issues of the broader economy? So, like, can they fix that?

20:43Probably they've got to do some incentives. But, you know, I don't know if there's still some some headwinds moving forward. And they are. They've got the five dollar tea and croissant kind of deal going on. They're pairings. It sounds like wine and cheese. cheese, but in fact, it's really, it's like a stale coffee cake and a cup of coffee. But it is working a bit, but this isn't going to work for investors from the stock's perspective. So in terms of margins, we were already concerned about labor costs. We were concerned certainly about their inability to pass on prices. Like the stock was during, you know, when it hit its peak back in 21, it was really in the perfect storm of coffee.

21:16It was one of those few places where investors, customers, excuse me, were out there getting that little bit of joy within COVID. So As someone that's traditionally owned Starbucks, in addition to love being a consumer, I haven't really owned the stock. I've got a very small position, but I've been out of this for a year and a half. And I think it can go a bit lower. And this is my call around discretionary. But we're getting there. I'm just not sure what Elliott in the back of the house here can really do. Yeah. Mike, your thoughts? Yeah, I mean, the big problem is the last two quarters we've had, certainly adjusting for inflation, negative real growth.

21:47And that's that's a real problem. And I don't think the last conference call when they reported and gapped down about 15 % was all that confidence inspiring. The CEO was talking about sort of the other product offerings, flavored teas and so on. And I recognize that those are representing a bigger chunk of the company's revenues right now. But the fact of the matter is they have some other operational challenges. They've got to shorten up those lines a little bit. And as everybody else was just saying, they've got to get sort of the periodic customer back in there, not just the folks that use the app.

22:17Yep. There's a lot more fast money to come. Here's what's coming up next.

22:48into overdrive. You're watching Fast Money, live from the Nasdaq market side in Times Square. We're back right after this.

23:02Welcome back to Fast Money. Stocks down across the board on Friday following CrowdStrike's global outage. The Dow dropping nearly 1%, but eking out a gain for the third week in a row. The S &P handing in its third straight loss today, closing out its worst week since April, and the Nasdaq officially snapping a six-week winning streak. Meanwhile, Eli Lilly shares finishing off their highs, but still up 1 % after the company's terzapatide weight loss drug secured approval from regulators in China. And several major themes dominating the market this week. The chip trade, for instance, losing major ground amid the recent rotation.