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Cloudflare (NET) Up 6% in a Month: How Should You Play Now?
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Cloudflare, Inc. (NET - Free Report) has experienced a notable rise recently, with shares climbing 6.2% over the past month. This upward trend adds to an intriguing year-to-date (YTD) journey marked by significant volatility.
After a remarkable 84.2% gain in 2023, NET stock carried this momentum into early 2024, hitting a 52-week high of $116 on Feb 9, following strong fourth-quarter 2023 results. However, the stock has experienced a roller-coaster ride, pulling back significantly.
Cloudflare's share price took a major hit after the company announced during its first-quarter 2024 earnings release that macroeconomic headwinds were hurting its sales growth. Following the quarterly results, NET stock plunged more than 16% on May 3.
Image Source: Zacks Investment Research
Despite this, the recent surge has renewed investor interest in the stock, prompting many to reconsider their positions. With such significant volatility, the critical question arises: should investors buy, hold or sell Cloudflare shares now?
Robust Market Position
Cloudflare has built a solid reputation for its innovative solutions in content delivery, internet security and edge computing. The company's mission to build a better internet has resonated with a wide range of customers, from small businesses to large enterprises. Its extensive global network, combined with a strong focus on performance and security, has positioned Cloudflare as a leader in the industry.
In its most recent earnings report for the first quarter of 2024, Cloudflare posted a 30% year-over-year increase in revenues, reaching $379 million. The company’s customer base continues to expand, with 197,138 paying customers and a notable increase in large customer accounts at the end of the first quarter.
NET added 122 new customers who contributed more than $100,000 in annual revenues during the quarter, bringing the total count of such customers to 2,878. This growth is supported by a high net retention rate, indicating strong customer loyalty and the ability to upsell additional services.
Despite its solid performance and market position, several factors suggest investing in Cloudflare at its current valuation might be a risky bet. Let's delve into the key reasons.
Valuation Concerns
Cloudflare appears overvalued from a price-to-sales perspective. The stock is currently trading at a forward 12-month P/S ratio of 15.09, significantly higher than the Zacks Internet - Software industry average of 2.57. This premium valuation raises concerns about the stock’s sustainability, signaling potential downward risk.
Image Source: Zacks Investment Research
The elevated valuation suggests that much of the future growth is already priced into the stock, leaving it vulnerable to any negative news or earnings misses.
Slowing Growth Rates
Although Cloudflare has experienced impressive growth since its IPO in 2019, recent quarterly reports indicate a slowdown. The company's revenue growth, while still robust, is not as explosive as in previous years.
Cloudflare enjoyed nearly 50% year-over-year top-line growth until 2022. However, the growth rate decelerated to 33% in 2023. Current estimates for 2024 and 2025 suggest further deceleration to around 27%.
Image Source: Zacks Investment Research
Similarly, Cloudflare has seen tremendous improvement in its bottom-line results over the past few years, turning profitable on a non-GAAP basis in 2022 and registering a robust 272% increase in 2023. However, earnings growth for 2024 and 2025 is projected to be around 27% and 28%, respectively.
Image Source: Zacks Investment Research
Near-term prospects might be hurt by softening IT spending as enterprises postpone large tech investments due to macroeconomic uncertainties and geopolitical issues. During its last earnings call, Cloudflare noted that macro headwinds forced companies to reduce cloud spending, hurting its revenue growth. This makes the company's near-term prospects appear cautious.
Intensifying Competition
The market for web infrastructure and security services is highly competitive, with several well-established players like Akamai Technologies, Inc. (AKAM - Free Report) , Fastly, Inc. (FSLY - Free Report) and Amazon.com, Inc.’s (AMZN - Free Report) Amazon Web Services vying for market share. Additionally, new entrants and niche players are constantly emerging, adding to the competitive pressure.
Cloudflare has successfully differentiated itself with a comprehensive platform that integrates performance, security and reliability. However, maintaining this edge requires ongoing innovation and significant investment in research and development. The constant need to stay ahead of competitors poses a risk to Cloudflare’s growth and profitability.
Conclusion
While Cloudflare's recent stock surge and strong market position are encouraging, significant volatility and high valuation warrant caution. The company's slowing growth rates, competitive pressures and macroeconomic uncertainties pose near-term risks.
Therefore, we believe investors should wait for a better entry point for Cloudflare, which currently carries a Zacks Rank #3 (Hold), given the modest growth prospects and a stretched valuation in the near term. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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Cloudflare (NET) Up 6% in a Month: How Should You Play Now?
Cloudflare, Inc. (NET - Free Report) has experienced a notable rise recently, with shares climbing 6.2% over the past month. This upward trend adds to an intriguing year-to-date (YTD) journey marked by significant volatility.
After a remarkable 84.2% gain in 2023, NET stock carried this momentum into early 2024, hitting a 52-week high of $116 on Feb 9, following strong fourth-quarter 2023 results. However, the stock has experienced a roller-coaster ride, pulling back significantly.
Cloudflare's share price took a major hit after the company announced during its first-quarter 2024 earnings release that macroeconomic headwinds were hurting its sales growth. Following the quarterly results, NET stock plunged more than 16% on May 3.
Image Source: Zacks Investment Research
Despite this, the recent surge has renewed investor interest in the stock, prompting many to reconsider their positions. With such significant volatility, the critical question arises: should investors buy, hold or sell Cloudflare shares now?
Robust Market Position
Cloudflare has built a solid reputation for its innovative solutions in content delivery, internet security and edge computing. The company's mission to build a better internet has resonated with a wide range of customers, from small businesses to large enterprises. Its extensive global network, combined with a strong focus on performance and security, has positioned Cloudflare as a leader in the industry.
In its most recent earnings report for the first quarter of 2024, Cloudflare posted a 30% year-over-year increase in revenues, reaching $379 million. The company’s customer base continues to expand, with 197,138 paying customers and a notable increase in large customer accounts at the end of the first quarter.
NET added 122 new customers who contributed more than $100,000 in annual revenues during the quarter, bringing the total count of such customers to 2,878. This growth is supported by a high net retention rate, indicating strong customer loyalty and the ability to upsell additional services.
Despite its solid performance and market position, several factors suggest investing in Cloudflare at its current valuation might be a risky bet. Let's delve into the key reasons.
Valuation Concerns
Cloudflare appears overvalued from a price-to-sales perspective. The stock is currently trading at a forward 12-month P/S ratio of 15.09, significantly higher than the Zacks Internet - Software industry average of 2.57. This premium valuation raises concerns about the stock’s sustainability, signaling potential downward risk.
Image Source: Zacks Investment Research
The elevated valuation suggests that much of the future growth is already priced into the stock, leaving it vulnerable to any negative news or earnings misses.
Slowing Growth Rates
Although Cloudflare has experienced impressive growth since its IPO in 2019, recent quarterly reports indicate a slowdown. The company's revenue growth, while still robust, is not as explosive as in previous years.
Cloudflare enjoyed nearly 50% year-over-year top-line growth until 2022. However, the growth rate decelerated to 33% in 2023. Current estimates for 2024 and 2025 suggest further deceleration to around 27%.
Image Source: Zacks Investment Research
Similarly, Cloudflare has seen tremendous improvement in its bottom-line results over the past few years, turning profitable on a non-GAAP basis in 2022 and registering a robust 272% increase in 2023. However, earnings growth for 2024 and 2025 is projected to be around 27% and 28%, respectively.
Image Source: Zacks Investment Research
Near-term prospects might be hurt by softening IT spending as enterprises postpone large tech investments due to macroeconomic uncertainties and geopolitical issues. During its last earnings call, Cloudflare noted that macro headwinds forced companies to reduce cloud spending, hurting its revenue growth. This makes the company's near-term prospects appear cautious.
Intensifying Competition
The market for web infrastructure and security services is highly competitive, with several well-established players like Akamai Technologies, Inc. (AKAM - Free Report) , Fastly, Inc. (FSLY - Free Report) and Amazon.com, Inc.’s (AMZN - Free Report) Amazon Web Services vying for market share. Additionally, new entrants and niche players are constantly emerging, adding to the competitive pressure.
Cloudflare has successfully differentiated itself with a comprehensive platform that integrates performance, security and reliability. However, maintaining this edge requires ongoing innovation and significant investment in research and development. The constant need to stay ahead of competitors poses a risk to Cloudflare’s growth and profitability.
Conclusion
While Cloudflare's recent stock surge and strong market position are encouraging, significant volatility and high valuation warrant caution. The company's slowing growth rates, competitive pressures and macroeconomic uncertainties pose near-term risks.
Therefore, we believe investors should wait for a better entry point for Cloudflare, which currently carries a Zacks Rank #3 (Hold), given the modest growth prospects and a stretched valuation in the near term. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.