Why CrowdStrike Stock Slumped on Wednesday

Shares of CrowdStrike Holdings (NASDAQ:CRWD) were trading sharply lower on Wednesday, falling as much as 4.9% in early trading and were still down 3% as of 11:50 a.m. ET.

The catalyst that sent the cybersecurity stock lower was a report that the company could face a new threat from artificial intelligence (AI).

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Budding competition?

Reports surfaced late on Tuesday that AI start-up OpenAI was in early discussions to acquire cybersecurity and security research company Trail of Bits, according to a report that first appeared in The Information. The software security company developed a following for its work in finding and securing vulnerabilities in open-source software.

The report suggested that this might be a first step by OpenAI in developing a competitive cybersecurity business.

This isn't the first time the two companies have been linked. Earlier this year, OpenAI partnered with Trail of Bits in the pair's Patch the Planet initiative, which sought to strengthen open-source software by identifying and securing exploitable vulnerabilities. During the first week, the collaboration uncovered hundreds of vulnerabilities and security issues and developed patches to secure them.

SaaSpocalypse, part 2

Today’s stock decline bears an uncanny resemblance to the rout that hit software-as-a-service (SaaS) stocks earlier this year on fears that AI would make them obsolete. Since then, many of these same stocks have rebounded and hit new heights as investors have come to understand that reality is much more complicated and that most of these offerings aren't so easily replicated.

Moreover, one of Wall Street's finest expressed his support for CrowdStrike in the wake of the report. BTIG analyst Gray Powell maintained a buy rating and raised his price target to $312 from $245 -- suggesting potential upside of 19% compared to Tuesday's closing price. The analyst suggested that investors are underestimating the pace of AI-based cybersecurity adoption and the potential to drive the company's long-term growth.

CrowdStrike stock is up 115% so far this year, resulting in a spike in its valuation. At 201 times forward earnings and 157 times next year's expected earnings, any bit of uncertainty could sink the stock. That said, since its IPO in mid-2019, CrowdStrike has gained 1,640%, underscoring why it deserves a premium.

Danny Vena, CPA has positions in CrowdStrike. The Motley Fool has positions in and recommends CrowdStrike. The Motley Fool has a disclosure policy.