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Buying a stock based on bad news may sound like a pretty bad idea at first. Why would you want to buy shares of a company that is facing a stumbling block?
It is important to watch the news carefully. If a particular company has navigated rough waters but has a solid long-term story, this could be a fantastic buying opportunity. That’s because you’re getting in on this potential long-term winner at a better price.
Two tech companies are currently in this situation CrowdStrike (NASDAQ: CRWD) And Super microcomputer (NASDAQ: SMCI). CrowdStrike was involved in the world’s largest IT outage ever after a defective software update in July. As for Supermicro, a short seller issued a report a few weeks ago claiming there were problems at the company.
Let’s take a closer look at each of these players and find out which one is making the better buy after 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 a huge impact – because so many companies and organizations rely on CrowdStrike’s platform. The event halted operations at hospitals, airports and many businesses. Although CrowdStrike launched a fix in about an hour, some customers suffered the impact for weeks.
But there is good news. First, the issue was not related to a security threat and did not affect CrowdStrike’s ability to do its job. Second, the company acted quickly to implement the fix.
In its recent earnings report, the company detailed the steps it has already taken to prevent such events from happening in the future. Additionally, CrowdStrike says most customers have stayed with the company – and the deal pipeline remains intact.
Here are some more details on why CrowdStrike is such a leader. The company sells an artificial intelligence (AI)-powered platform called Falcon, a single lightweight element that collects data from the customer and beyond to detect potential threats. CrowdStrike offers 28 modules that easily attach to Falcon, and customers can choose from them based on their needs.
This model has helped the company’s profits skyrocket. Annual recurring revenue increased 32% last quarter to $3.8 billion. GAAP net income increased more than five times year over year, and operating cash flow and free cash flow reached records.
There is reason to be optimistic that the IT disruption, however difficult, will not change this solid long-term story.
The case for Supermicro
Supermicro stocks have soared higher in recent years, even outperforming the stock market’s darling Nvidia in the first half when it rose 188%. That’s because this equipment maker has seen profits explode higher, thanks to 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 was so strong that it announced a stock split to lower its price per share and make it more accessible to a wider range of investors. That will happen on October 1.
But a recent short report has weighed heavily on this top tech player. Hindenburg Research released a report alleging several problems at Supermicro, including “red flags in accounting” and “export control failures.” This unfortunately coincided with a delay at Supermicro in filing its 10-K annual report. As a result, the stock has fallen more than 20% since late August.
It’s important to keep in mind that Hindenburg is biased against Supermicro because the company is short the stock – so Hindenburg benefits if Supermicro’s stock falls. Supermicro says the Hindenburg report contains “false or inaccurate statements.” Regarding the delay in filing the 10,000, the company says it doesn’t expect any major changes in fourth-quarter or full-year results.
I don’t expect these issues to change Supermicro’s long-term story. The company has shown growth five times faster than its industry in recent quarters, thanks in part to its close collaboration 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 weather these tough times, remain successful and represent excellent long-term buys. They have seen their prices drop, and that has resulted in a drop in valuation. So they are better bargains than a few months ago.
That said, CrowdStrike’s valuation, while reasonable, isn’t exactly in bargain 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.
Where you can invest $1,000 now
If our analyst team has a stock tip, it could be worth listening to. After all, Stock Advisors the total average return is 720% – a market-crushing outperformance compared to 160% for the S&P 500.*
They just revealed what they believe to be the 10 best stocks for investors to buy now… and CrowdStrike made the list, but there are nine other stocks you might be overlooking.
*Stock Advisor returns September 9, 2024
Adria Cimino has no position in any of the stocks mentioned. The Motley Fool holds and recommends positions in CrowdStrike and Nvidia. The Motley Fool has one disclosure policy.
Better Buy Bad News: CrowdStrike vs. Super Micro Computer was originally published by The Motley Fool