CrowdStrike-Delta legal face-off could end up in settlement: Citi

Citi weighed in on potential legal ramifications for CrowdStrike (NASDAQ:CRWD) post-outage, ahead of the company’s earnings on Wednesday.

Analysts led by Fatima Boolani noted that they have greater comfort that CrowdStrike’s financial obligations are likely to be contained (limitation of liability clauses, most capped at about 2-3x) and will likely be enforced as such through contract law provisions should the process move towards trial — following their conversation with NYU Law Professor Chris Sprigman to improve their scenario analyses for CrowdStrike’s liabilities scope especially in relation to Delta Air Lines (DAL).

Delta Air Lines (DAL) had alleged that the cybersecurity company was to blame for the carrier’s extended flight disruptions in the aftermath of last month’s global tech outage. However, CrowdStrike had rejected allegations that it was negligent or committed willful misconduct.

Boolani and her team said that Delta’s ability to identify contract loopholes remains the biggest uncertainty, though early indicators suggest this may prove challenging, mainly in the context of Delta’s alleged outdated IT infrastructure a likely reason behind its prolonged recovery efforts.

The analysts added that while Delta versus CrowdStrike is unprecedented in case-law, Sprigman suggests a settlement appears the most-likely rational scenario — sidesteps costly legal fights, reputational damage; avoids scrutiny of several constituencies, regulatory bodies — where tail risk from protracted/new legal scenarios also looks low.

The analysts noted that their main takeaway from the discussion was a sense of comfort around the legal overhang, seeing potential resolution.

This most likely would turn into a settlement, as opposed to a trial and pre-trial processes that would bring inordinate financial/reputational risk to both parties (especially with Delta under far more regulatory and government scrutiny as an airline, through the U.S. Department of Transportation), and with terms not too unfavorable to CrowdStrike (limitation of liability related payouts have caps), with all of this over the course of what Citi gleaned as an un-egregious timeframe, said Boolani and her team.

However, the analysts noted that even if the legal overhang goes away sooner than they expect, CrowdStrike estimates likely require a near-term reset, and mid-term conviction rebuild around new/expansion business velocity recovery (path to $10B ARR, confidence that ‘cost of doing business’ is not structurally higher thus impacting operational margin/ and free cash flow margin) before investor confidence is reinvigorated in full.

Crowdstrike keeps a Buy rating at Citi with a $300 price tag.

CrowdStrike (CRWD) has a Hold rating at Seeking Alpha’s Quant Rating system, which consistently beats the market. Meanwhile, the Seeking Alpha authors’ average rating is more positive with a Buy, and so is the average Wall Street analysts’ rating, Buy.