Investing Lessons from Global IT Outage

What We Can Learn From Global IT Outrage?

Last Friday, a global IT outage, triggered by a defect in an update to CrowdStrike’s cloud-based cybersecurity platform, Falcon, affected businesses and government agencies using Microsoft computers. The incident, one of the largest global IT outages in history, revealed a software update error in Microsoft’s (NASDAQ: MSFT) operating system, impacting 8.5 million Windows devices worldwide, including those used by central banks, media outlets, and airlines. Although this was less than 1% of all Windows machines, the economic and social impacts were significant.

The outage halted operations in banks, airlines, train operators, and supermarkets globally. As a result, CrowdStrike’s (NASDAQ: CRWD) stock plummeted, prompting analysts to set new price targets and some market experts to lower or downgrade CRWD shares.

What investing lessons can we learn from this global IT outage caused by a cybersecurity company?

 

Investment Opportunity 1. Promising Sector: Hybrid Multi-Cloud

The recent IT outage highlighted the vulnerability in the vendor-clients structure of cloud services, exemplified by the issue caused by CrowdStrike, a company that should ideally prevent such third-party risks. The impact was widespread, demonstrating the dangers of single cloud dependency and the massive scale of the damage caused.

As a result, the demand for distributed cloud system designs is expected to increase. The importance of hybrid and multi-cloud solutions will grow as businesses move from single to multi-cloud strategies. This shift represents a significant investment opportunity in the hybrid multi-cloud sector. Companies offering robust multi-cloud management solutions will benefit as businesses look to diversify their cloud infrastructure to enhance resilience and reduce the risk of future outages.

Companies to Watch in the Hybrid Multi-Cloud Sector

• Oracle (NYSE: ORCL)

  Oracle’s strategic partnership with Google and Microsoft highlight its commitment to providing versatile and robust multi-cloud solutions, making it a key player to watch in the hybrid multi-cloud sector.

  Oracle recently announced a multi-cloud partnership with Google, enabling Oracle Cloud Infrastructure (OCI) and Google Cloud network interconnect in 10 regions. This collaboration will provide customers with direct access to Oracle database services running on OCI within Google Cloud. By the end of this year, Oracle plans to have 12 Oracle databases live at Google Cloud sites.

  In addition to Google, Oracle has already partnered with Microsoft. This partnership allows Azure customers to easily procure, deploy, and use Oracle database services running on OCI through the native Azure portal and APIs. This integration offers an OCI-in-Azure-like experience, providing more choices for multi-cloud architecture.

  Oracle CEO Safra Catz emphasized the significance of these partnerships, aiming to expand Oracle’s reach and capabilities in the multi-cloud environment. Despite Amazon’s AWS not being a part of Oracle’s large cloud customer base, Oracle co-founder Larry Ellison expressed interest in forming a similar partnership with AWS in the future.

• IBM (NYSE: IBM)

  IBM has robust platforms like Watsonx and Red Hat OpenShift and aims to strengthen its automation solutions in the hybrid multi-cloud sector through strategic acquisitions of HashiCorp. IBM is well-positioned to capitalize on increasing demands for flexible cloud architectures and advanced AI solutions.

  IBM operates through four main business segments: Software, Consulting, Infrastructure, and Financing. The software segment is IBM’s largest source of revenue and profits, integrating IBM’s software solutions with its hybrid cloud platform to help clients manage their data and automate and secure their systems. IBM’s infrastructure segment provides hybrid cloud solutions tailored to the new requirements related to hybrid multi-cloud and enterprise AI workloads. This includes high-performance servers, storage solutions, and cloud infrastructure-as-a-service (IaaS).

  To enhance its hybrid cloud capabilities, IBM announced its plan to acquire HashiCorp, a dominating provider  in multi-cloud infrastructure automation solutions. HashiCorp’s tools, such as Terraform, help developers set up and manage their cloud and data centers. Meanwhile, Red Hat’s Ansible supports maintaining operations. The company considers Terraform a “day one” solution for getting started in cloud, and Ansible a “day two” solution to keep things running.

 

Investment Opportunity 2. Investing in Competitors Like PANW

Investment in cybersecurity will remain crucial as long as companies rely on cloud services. The recent global IT outage has shown that there is no guarantee against similar issues occurring again. Although the issue was quickly resolved, it highlighted the vulnerability of cloud systems to both errors and potential attacks. This suggests that demand for leading cybersecurity firms will increase, potentially benefiting competitive companies in the sector.

Palo Alto Networks (NASDAQ: PANW) is another leader in the Cloud Workload Security field alongside CrowdStrike. Investing in such firms could be a wise move as they stand to gain from increased demand for robust cybersecurity solutions.

 

Investment Opportunity 3. Buying CRWD at a Low Point

CrowdStrike demonstrated its significant influence by causing a major outage affecting Microsoft. The issue stemmed from a simple update error, ironically underscoring the cybersecurity company’s power and reach. Recently, Google acquired WIZ, highlighting the ongoing need for enhanced cybersecurity. This suggests a recognition of the importance of continuously improving security technologies.

Despite Microsoft’s status as the world’s largest security company, it has used CrowdStrike’s services, a testament to CrowdStrike’s superior security offerings. However, potential lawsuits and financial repercussions from the outage could harm CrowdStrike’s financial health and reputation. This might affect its pricing power and ability to attract new clients.

 

Currently(July 22), CrowdStrike (CRWD) is trading at $264 with a price-to-earnings ratio (PER) of 576 and a forward PER of 76. Considering the valuation levels of other key cybersecurity firms, buying at a low point might be feasible. For comparison, PANW has a PER of 48 and a forward PER of 59, Microsoft (MSFT) has a PER of 38 and a forward PER of 37, and ServiceNow (NOW) has a PER of 80 and a forward PER of 56.

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*References: Barron’s, Investopedia, Forbes, Finbold, Google Finance, IBM Blog, Oracle