CrowdStrike's Rally Faces a Test-Here's Why That's Good

CrowdStrike Holdings Inc. (NASDAQ: CRWD) continues to be one of the best-performing technology stocks and cybersecurity stocks. But with that performance, many investors are looking at the company’s valuation. The stock is trading at 871x earnings, which is higher than one of Wall Street’s most controversial stocks, Palantir Technologies Inc. (NASDAQ: PLTR).

When you add the fact that we’re about two weeks away from CrowdStrike’s earnings report, investors can expect volatility. That tends to get the attention of traders. In fact, it may explain some of the recent price action with CRWD stock.

A pullback may be in order with CrowdStrike stock up over 460% in the last five years. Stocks don’t move in one direction, and it wouldn’t be surprising if CRWD stock is in need of a breather.

CRWD Stock Shows Active Trader Interest

Long-term investors are told not to pay too much attention to traders' actions. That’s true to a point. In other words, if the story underlying CrowdStrike stock hasn’t changed, it's best to sit tight through periods of volatility.

However, if you know what’s normal for a stock, you’ll know what’s abnormal. In the case of CRWD stock, knowing what traders are looking at may help you understand what to expect before the company reports earnings in early June, and help you maintain your conviction without losing sleep.

Here are two things of note: 

Short Interest Is Up Sharply in the Last Month

One metric investors can use to determine if a stock is likely to drop is its short interest. CrowdStrike's short interest isn’t as high as the overall amount of its float, but it’s up about 13% in the last 30 days. That means investors expect the stock to move lower.

Of course, short interest can also be a bullish signal. In the last month, CRWD stock has been up 18%, and some of that gain can be explained by short sellers having to cover their short positions.

Options Traders Are Hedging Their Bets

Investors can use the options chain metric to gauge trader sentiment. In the case of CrowdStrike, the options chain for May 30, the last trading day before the company’s earnings report, shows a mixed picture of bulls and bears.

As of this writing, there was significant put volume with strike prices of $415 and $400. The $400 stock price would be about a 10% decrease from the current price. However, there was also strong call volume at stock prices of $460 and even $500.

It’s not necessarily unusual to see heavy call and put volume for a stock heading into earnings. But when you see a range of stock prices like this, you know that traders are conflicted and may be hedging their bets on what’s likely to happen with CRWD stock.

The One Thing for Investors to Remember

Cybersecurity will continue to be a priority for businesses of all sizes in the age of artificial intelligence. CrowdStrike’s platform gives these companies an à la carte menu of services to handle their cybersecurity needs.

As previously mentioned, after CrowdStrike’s well-publicized outage last year, the company offered several affected customers a goodwill offering of one or more services on the Falcon platform.

Those contracts will roll off in 2025, and the bull case says it will be accretive to CrowdStrike’s top line in the year's second half.

All of which reminds investors that a company is separate from its stock.

CrowdStrike is a leader in the cybersecurity space.

That isn’t going to change because its stock price drops. In fact, it’s quite the opposite. A pullback from its all-time high should excite buy-and-hold investors who can open or add to a position in CRWD stock with the chance for significantly more upside. 

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The article "CrowdStrike’s Rally Faces a Test—Here’s Why That’s Good" first appeared on MarketBeat.