After the mass IT outage caused by a CrowdStrike (NASDAQ:CRWD) update earlier this month, the cybersecurity company is facing major risks on multiple fronts. Moreover, the valuation of CrowdStrike stock remains very high. Also importantly, the firm does have multiple, strong competitors.

While CrowdStrike stock could very well recover in the long term, I believe that the name’s risk-to-reward ratio is quite unattractive in the near-to-medium term. In light of all of these points, I recommend that investors sell the shares.

Risks on Multiple Fronts

Speaking on CNBC yesterday, Stephanie Link, chief investment strategist and portfolio manager at Hightower, noted that CrowdStrike faces risks when it comes to the prices that it can charge its customers when they renew their contracts. Additionally, some customers could stop utilizing CrowdStrike’s services altogether, and the firm may face sizeable legal fees as a result of the outage, Link stated. Delta Air Lines (NYSE:DAL) just announced it was suing CrowdStrike over the outage.

At this time, it’s difficult to know the extent to which all of these issues will hurt the company and CrowdStrike stock, she said.

Customer Losses, Price Cuts Are Major Threats

In a July 29 note to investors, Morgan Stanley reported that it would be “relatively” expensive for companies to switch from CrowdStrike to a different cybersecurity firm. Nonetheless, Elon Musk reported on the day of the outage that his companies had “deleted” the company’s software from their systems. The statement suggests that Tesla (NASDAQ:TSLA) and SpaceX, Musk’s two major companies, will stop utilizing CrowdStrike. If Musk’s companies were able to quickly part ways with CrowdStrike, many other sizeable firms can do so as well.

Indeed, even Morgan Stanley, which remains bullish on CrowdStrike stock, predicts that the firm’s billings will drop by about 20% in the second half of this year. Moreover, the bank concedes that some of the firms that are considering using CrowdStrike could wait longer than usual before pulling the trigger on deals with the embattled firm.

And I believe that many firms will demand and receive sizeable discounts from CrowdStrike in the wake of the outage.

Another investment bank that remains bullish on CrowdStrike stock, Wedbush, admitted that the cybersecurity firm could lose a number of deals, saying that the incident “could create opportunity for some competitive displacements.”

CrowdStrike does have multiple, strong competitors. Morgan Stanley mentioned SentinelOne (NYSE:S) and Microsoft (NASDAQ:MSFT) as two companies that firms looking for cybersecurity providers could consider instead of CrowdStrike. Meanwhile, Palo Alto Networks (NASDAQ:PANW) is seen as a major heavyweight in the sector, while BlackBerry (NYSE:BB) is a sizeable player in the financial and government sectors. All of these firms could very well take market share from CrowdStrike.

Valuation and the Bottom Line on CrowdStrike Stock

CrowdStrike stock has tumbled about 30% since July 15. Nonetheless, its trailing price-to-earnings ratio is still a huge 480 times, according to Yahoo Finance, while its enterprise value/EBITDA ratio is a gigantic 166 times.

Given this gigantic valuation, along with the high chances of the company losing customers and having to cut its prices over the next year, the chances of the shares sinking meaningfully during that period are quite elevated.

On CNBC yesterday, Virtus Investment Partners Senior Managing Director Joe Terranova said that CrowdStrike is likely to recover in the long term, following in the footsteps of Chipotle Mexican Grill (NYSE:CMG) in the wake of its food poisoning incidents in the 2010s. Terranova could very well ultimately be proven right. However, I believe that CrowdStrike and CrowdStrike stock will experience a great deal of pain before embarking on such a recovery.

On the date of publication, Larry Ramer held a long position in BB. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.        

On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.