CrowdStrike outage nets $461 million payday for short sellers

The contrarian group reaped paper profits of $461 million on the cybersecurity software company’s 11% drop, according to data from S3 Partners LLC. The selloff was enough to swing CrowdStrike short sellers to gains year to date. Shares of the company fell as much as 13% Monday, adding even more to the cohorts’ mark-to-market profits. 

Total short interest in the systems software sector — or, the dollar amount of bets that the stocks will decline — has increased by nearly $12 billion so far this year, per S3 data. More than $7 billion of that figure is made up of increased short selling, while the remainder is due to the mark-to-market increase in the value of shares shorted. CrowdStrike has seen the second-largest uptick in short selling in the sector this year, trailing only giant Microsoft Corp. 

“We should see continued short selling in this sector, but as we saw over the last 30 days, short selling and short covering will be name specific,” Ihor Dusaniwsky, managing director of predictive analytics at S3, said in a Friday report. 

Multiple analysts covering the company downgraded ratings and cut price targets over the weekend, further weighing on shares Monday.  

“We find it difficult to tell investors that they need to buy CRWD right now,” Guggenheim analysts led by John DiFucci wrote in a note dated July 21, downgrading shares to neutral from buy citing possible resistance to new deals in the near-term following the outage. 

While DiFucci removed his $424 price target on CrowdStrike shares, he said he believes “that the company will eventually become even stronger as a result of this incident, and if investors have a multi-year horizon, they can ride it out.” 

Analysts at Scotiabank cut shares to sector perform from outperform, calling the outage a “black mark on a previously unblemished record.” They also cut their price target to $300 from $393. 

The incident adds to uncertainty ahead of the company’s second quarter earnings, expected at the end of August.

“CrowdStrike deserves a top-tier multiple, but we see the risk/reward as more balanced at these levels,” Scotiabank analysts led by Patrick Colville wrote in a Monday note. 

Despite the global IT debacle, Wall Street remains largely bullish on the company, which has 41 buy ratings, eight holds and two sells. The average analyst price target of around $390 a share represents a more than 40% upside from where the stock currently trades. CrowdStrike shares are still up about 7% this year even after the selloff.