Crowdstrike (CRWD) Maintains Investor Confidence After Outages

network. All right, Nasdaq is now up a percent. Nvidia trying to firm up. And we're getting some help from cloud too. CrowdStrike got a big rally. Salesforce is still positive. Joining us Joseph Gallo is a software research analyst at Jefferies. Tom's here in studio. Going to look at some of the options and trade some software businesses. CrowdStrike with a pretty nice pop here. Joe tell me what you think is going on. Yeah I would classify or classify it as better than feared. Right. So obviously they had the it outage incident about six weeks ago that impacted new business. There was about 60 million of deal slippage in TCU. TCU is much stronger than expected. And then they obviously had to lower guidance by about 100 million. This was well telegraphed. People knew that numbers would be coming down. And so now that we've had this resetting moment, I think now you have long only stepping in and can now defend the stock. We continue to think that the September 18th Analyst Day is the big catalyst here, where you get better visibility and granularity into their long term targets. What type of details do they give there that they aren't here? So they've maintained their $10 billion of IRR target for fiscal 31. I think they'll give you a better framework of how to get there and potentially what you know, fiscal 26 will look like and beyond. So I think it's just increased confidence in what you can think about for free cash flow margins, as well as increased confidence in those targets. The big question was if folks were going to back out of their agreements with CrowdStrike, if they were going to cancel, does it look like some did or is it just maybe not as many as it could have been? Obviously, when they bring in their guidance, that seems like they had to, you know, retool in a negative way. But that could come from just, you know, a, I guess to some extent, expenses when it comes to profit. But revenue that tells us some people left, right. Yeah, it depends on who you listen to. Right. So if you listen to Sentinel one last night or two nights ago, it was clear they've taken some share. And they think that some customers have already switched and they expect more to do. So. If you listen to CrowdStrike and we agree with this, it's a really sticky product. There's obviously they had to be contrite. They had to say sorry. They had to make it right with their customers. That's where the $100 million revenue cut for the next two quarters, effectively came into play. Right. They're going through these programs. They're discounting. They're giving away incremental modules. A lot of this stuff, we continue to believe that it's a sticky product. There's not a lot of viable alternatives. You really if you're an enterprise customer, you could probably only use Sentinel one. And I don't know that you're only going to use Microsoft or some of these other vendors, right, because they've had some of their own issues. And so again, we continue to believe CrowdStrike is best in breed. We think they took an appropriately prudent cut. You know, the CFO last night completely endorsed this, said, hey, we're very, very comfortable with this guidance. And so therefore I think you'll see the shares continue to work from that. It seems like also the customers most likely to maybe just back out and switch would be sort of the smaller businesses, the ones that maybe they can go with a kind of less comprehensive offering from somebody else. So in that sense, the stickiness of the big customers kind of makes some sense, right? Pretty hard for them to try and move all their infrastructure over. So CrowdStrike throws out a little freebie to keep some of the others happy. And, you know, we move on then. I mean, is that pretty much the story? Will they give us something that looks fuller in that next shareholder meeting? Yeah, I think you nailed it on the head. Right. So the magic number we've heard about in our conversations with people is a thousand endpoints. Once you're larger than a thousand people, CrowdStrike is ingrained in your processes. It's just a really big lift to rip. And replace. Right. And don't forget that CrowdStrike has saved a lot of security people's butts the last couple of years. And so people remember that, including our own CISO team here at Jefferies. Right. And so one event I think people are willing to forgive, obviously, some people were overly impacted. That's where you're seeing the revenue cuts. That's where you're seeing the freebies, the incremental modules. But we don't expect a massive uptick in churn to happen from this, particularly in the large enterprise. As you laid out. Okay, now thinking then about the rest of the group, does it look pretty healthy? Generally, these cloud names have been kind of a struggle on the year with all of the I focus on hardware. Is there a reason for that to change? If these earnings from Salesforce to here are generally positive? Well, that's where I think I have the best house in a moderating neighborhood. Right. So I think you've seen software lag a little bit because people are waiting for that AI inflection. Right? Right now everybody's kind of in a, you know, kick the tires mode. They're not necessarily deploying AI. When they start to deploy AI, you'll see broader software benefit to application, infrastructure, cloud software providers. I cover cybersecurity. So I'm very fortunate. And cutting your cybersecurity budgets right. And so in that world cyber continues to be fine, continues to be resilient. I think we've seen that play out this earnings season okay. Totally. All right. Appreciate it. Good stuff Joe thanks for the analysis. Yeah. Very helpful. Tom, let's, let's trade it. You know, and to Joe's point, like, you know, you look at some of the cyber funds and stuff and the group is doing a heck of a lot better than the rest of cloud. So the fact that CrowdStrike can still lead the way, maybe I think is a good thing. You mentioned that that move and pivot to, you know, the money and capital put being put into AI at this point right now. Well, one of the things that on CapEx spend a lot of these big companies can't pull back on is cybersecurity. So not surprising. We've seen CrowdStrike rebound. It was a little bit better than what the street and anticipated going into this move or this earnings event. The stock was pricing in about a plus or -9% move about $23.5. So we're getting some of that back. Stock is now positive on the year. So I looked at something a little bit more conservative because I still think there's bombs out there. You mentioned that September 18th shareholder meeting where they're probably going to lay out more clarity on the outage. So looked at the September 20th, the weekly or monthly cycle. So 22 days to expiration. I just looked at selling and out of Thl bullish in direction right. So selling I put buying the 255 put so short $10 wide neutral to bullish short put vertical. You're collecting roughly about a 260 credit on it. That's what you can make. Your risk is going to be just over 700 bucks. So you break even though all the way down to two 6240. Now that's about six. And a half percent below the current share price in there. The probability of that short 265 strike being out of the money at expiration, which is what you want, right? You want the stock to remain above 265. That's about a 70% probability of success on that. Going into that expiration, which is in three weeks or so. So a little bit conservative, but you're still taking that bullish stance and better probabilities okay. So at this point you're betting that the level it's been at is going to hold. It's not going to break down. Well yeah it did print down to 251 I believe after earnings last night. But it was only there for about a minute. Came on back. Yeah. Came all the way back okay. Cool. I think that trade makes sense. You got a little bonus trade for us. Next week we'll get Zscaler shares up about 3%. What are you looking at here? Yeah I think his price targets about 250 on this one. He's got a buy rating on it. All right. We're at 200 right now. Yeah. So I looked at something a little bit more aggressive on here. But taking advantage of those implied volatility levels because going into that earnings event on the third that option series implied volatility is elevated at about 100% on aggregate. In that option series. So I looked at a call diagonal that takes advantage of that going out to the September monthly cycle. The 20th. So 22 days to expiration buying the at the money call the 195 strike call slightly in the money and then selling the September 6th weekly. We're going to capture that earnings event. The 215 strike call. So a bullish $20 wide call diagonal to the upside. You're paying roughly about a nine and a half dollars debit. So it's less than half the width of the call diagonal strikes. In here you're paying roughly 950 debit. That takes your break even to around 200, because you'll have that ability to roll that short option a couple of times as you get closer to expiration over the next eight days in there. So maybe this call diagonal buying a 69% implied volatility level in September 20th options selling about 100%. That dispersion between implied volatilities creates a lower input price or risk on this trade. Got it. All right okay. So two positive ways to look at cloud companies. Cyber trades