Buying a stock on bad news may sound like a pretty bad idea at first. Why would you want to pick up shares of a company that’s facing a stumbling block?
It’s important to consider the news carefully. If a particular company has been navigating rough waters but has a solid long-term story, it could be a fantastic moment to buy. That’s because you’ll get in on this potential long-term winner for a better price.
Two technology companies in this situation right now are CrowdStrike (NASDAQ: CRWD) and Super Micro Computer (NASDAQ: SMCI). CrowdStrike, following a faulty software update in July, was involved in the world’s biggest information technology-outage ever. As for Supermicro, a few weeks ago, a short-seller released a report alleging troubles at the company.
Let’s take a closer look at each of these players and find out which one makes the better buy following their recent declines.
The case for CrowdStrike
CrowdStrike is a leader in the world of cybersecurity. This leadership is part of the reason the outage had such an enormous impact — because so many companies and organizations rely on CrowdStrike’s platform. The event halted operations at hospitals, airports, and many businesses. Though CrowdStrike launched a fix in about an hour, some customers suffered the impact for weeks.
But there’s some good news here. First, the problem wasn’t linked to a security threat and didn’t call into question CrowdStrike’s ability to do its job. Second, the company acted quickly to issue the fix.
In its recent earnings report, the company detailed the steps it’s already taken to prevent any such event in the future. On top of that, CrowdStrike says most customers have stuck with the company — and the deal pipeline remains intact.
Here’s a bit more detail about why CrowdStrike is such a leader. The company sells an artificial intelligence (AI)-powered platform called Falcon, a single lightweight element that gathers data from the customer and beyond to detect potential threats. CrowdStrike offers 28 modules that easily attach to Falcon, and customers can pick and choose among them according to their needs.
This model has helped the company’s earnings soar. Annual recurring revenue advanced 32% in the recent quarter to $3.8 billion, GAAP net income climbed by more than five times year over year, and operating cash flow and free cash flow reached records.
There’s reason to be optimistic that the IT outage, though difficult, won’t change this solid long-term story.
The case for Supermicro
Supermicro stock has roared higher in recent years and even outperformed stock-market darling Nvidia in the first half as it gained 188%. That’s because this equipment maker has seen earnings explode higher, thanks to its sales to AI customers building out their data centers. Supermicro offers everything from servers to full rack scale solutions.
In fact, the company’s stock performance has been so strong that it announced a stock split to bring down its per-share price and make it more accessible for a broader range of investors. That’s set to happen on Oct. 1.
But a recent short report has weighed heavily on this top tech player. Hindenburg Research issued a report alleging various problems at Supermicro, including “accounting red flags” and “export control failures.” This unfortunately coincided with a delay by Supermicro in the filing of its 10-K annual report. As a result, the stock has dropped more than 20% since the end of August.
It’s important to keep in mind that Hindenburg has a bias against Supermicro, as the firm has a short position on the stock — so Hindenburg benefits if Supermicro shares fall. Supermicro says the Hindenburg report contains “false or inaccurate statements.” Regarding the 10-K filing delay, the company says it doesn’t foresee any major changes to its fourth-quarter or full-year results.
I don’t expect these issues to change Supermicro’s long-term story. The company has posted five times faster growth than its industry in recent quarters, due, in part, to closely working with top chip designers so it can immediately integrate their innovations into its equipment. Growth in the AI market should help Supermicro maintain this momentum.
CrowdStrike or Supermicro?
Both companies should be able to make it through these difficult times and go on to succeed, and represent excellent long-term buys. They’ve seen their prices decline, and that’s resulted in declines in valuation — so they’re better bargains than they were a few months ago.
That said, CrowdStrike’s valuation, though reasonable, isn’t exactly in bargain-basement territory right now — but Supermicro’s is. Supermicro trades for only about 12x forward earnings estimates, while CrowdStrike trades for 68x. That’s why Supermicro is the better bad-news buy right now for an investor who can tolerate some risk.
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Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends CrowdStrike and Nvidia. The Motley Fool has a disclosure policy.
Better Bad-News Buy: CrowdStrike vs Super Micro Computer was originally published by The Motley Fool
