July 23, 2024

Struck out

Hi there, 

CrowdStrike’s faulty update took down millions of Windows computers on Friday.

Could we have seen this coming?

Interestingly, a CrowdStrike customer we interviewed who works in a hospital network highlighted quality control issues around the company’s releases when we spoke to them. 

More on that later. 

The havoc the update created has also placed immense pressure on CrowdStrike — its stock closed down 11% that day and dropped another 13% on Monday as the fallout continued.

If you’re a customer of or investor in CrowdStrike, one important question you need to have a view on is:

Will we see mass migration away from CrowdStrike and hence dramatically worse retention and bookings in the coming quarters? 

Let’s break it down using CB Insights data, including interviews with CrowdStrike customers.

Standout from the crowd

First, some background. 

CrowdStrike is a leader in endpoint security — the protection of physical devices like laptops and phones from bad actors. 

The company has grown rapidly. CrowdStrike IPO’d at a $6.7B valuation in 2019 and now has a $64.2B market cap. 

Between fiscal ‘23 and ‘24, revenue increased 36% from $2.24B to $3.06B. 

It is, however, not alone in this market. There are viable alternatives including:

• SentinelOne (ticker: S, $7.2B market cap)
• Palo Alto Networks (ticker: PANW, $108B market cap)
• Microsoft Defender (ticker: MSFT, $3.29T market cap)
• Trend Micro (ticker: TMICY, $6.3B market cap)

And there are others as well.

Some competitors have encountered difficulties, such as Cybereason, which saw its valuation drop 87% — from $3.1B to $417M — in a down round last year. 

Word on the street

So there is and has been formidable competition for some time.

What are customer perceptions of CrowdStrike?

We mined our interviews with CrowdStrike customers (pre-incident) to understand their satisfaction and renewal intent.

First, here's the summary of what CBI's buyer transcripts highlight:

• Average CSAT score: 8.9 (scale of 1-10)
• Average intent to renew: 93%

These are really strong numbers. 

Customers cite its product innovation (including AI capabilities) as well as support for multiple operating systems among its strengths compared to competitors.

Similarly this customer cites CrowdStrike as a “best-of-breed” solution — a common sentiment in interviews — despite the customer’s current agreement with Microsoft. 

Customers do point to opportunities for improvement around cost.

And this healthcare customer with $2M in annual spend indicated, rather presciently, room for growth in quality control around releases: 

Bottom line

The scale of Friday’s incident may be enough to turn some customers to competitors. SentinelOne’s stock closed up nearly 8% on Friday and Palo Alto’s up 2% as investors had similar thoughts. 

So while intent to renew in our conversations has been high, we’ll see if that continues in future interviews given Friday’s debacle.

But existing customers are unlikely to flock away in large numbers. 

The reality is CrowdStrike is a leader in its market, and based on our interview data, customers are broadly happy. Interviews also highlight that competitors need to innovate on their core products to stay on par. 

Churn is less likely in this scenario, especially given the brain damage of migrating to other solutions. 

New bookings, however, may be tough given well-capitalized competitors that also have broadly happy customers.

I love you.

Anand

@asanwal 

P.S. In other security news, Alphabet’s $23B acquisition of Wiz has been scrapped. Wiz and CrowdStrike also compete in some areas. Unclear and unlikely the deal’s demise is related but certainly interesting times in cybersecurity.

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