Cloudflare Looks Overvalued Amid Threat From Fastly

Cloudflare (NYSE:NET) appears to offer solid content delivery networks and IT security products that should enable the company to grow significantly going forward. But given the sky-high valuation of NET stock, and the strong threat from Fastly (NYSE:FSLY), I recommend that investors sell Cloudflare at this time.

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Cloudflare’s bread and butter seems to be IT security. Fastly recently acquired a strong IT security company. Additionally, for medium and large companies, Fastly’s products appear to have more impressive and innovative features.

Cloudflare Has Good Products and Strong Potential

There are many indications that Cloudflare’s systems are excellent, while the company’s looks poised to continue growing significantly.

For example, on July 28 research firm Jefferies upgraded NET stock to “buy” from “hold.” According to the firm, the company “is ‘disrupting’ legacy network and cloud security with a ‘unique’ cloud-based architecture and freemium model.” Further, Jefferies expects the company to generate “hypergrowth for multiple years.” The firm placed a $50 price target on NET stock.

Meanwhile, InvestorPlace columnist David Moadel is bullish on the company’s new “network-as-a-service solution.” This, he explained,  is “designed to keep workforces secure.”

Also upbeat on NET stock was a Seeking Alpha columnist who in August wrote that:

“Cloudflare provides comprehensive performance and security coverage for the entire web application. Legacy solutions are piecemeal and may require time-consuming changes to the application code and infrastructure configuration for implementation.”

Moreover, in the second quarter, Cloudflare reported impressive achievements. These include 48% year-over-year revenue growth and 7,000 new revenue-generating customers.

CEO Matthew Prince reported in August that the company is starting to make inroads with huge companies.

Fastly Looks to Be Catching Up on the Security Front

I believe that the company’s main competitive advantages are its IT security systems, along with its simplicity and affordability compared to conventional products.

But, as I noted, Fastly recently acquired an IT security company with excellent credentials. More specifically, in my Oct. 6 column, I wrote that Fastly had completed its takeover of IT security company Signal Sciences.

Importantly, my column also pointed out that “before launching Signal Sciences, the company’s founders developed IT security products for a major e-commerce website, Etsy (NASDAQ:ETSY).” Also, “Signal provides security to more than 40,000 web applications.” In summary, Signal sounds like a heavy hitter that will greatly improve Fastly’s IT security offerings.

Meanwhile, Fastly is taking other steps to improve its IT security capabilities. Specifically, in August CEO Joshua Bixby noted that the company is investing in security while developing new security capabilities.

Fastly’s Products Appear to Be Exceptionally Valuable

IT departments appear to find Fastly’s offerings exceptionally valuable because they excel at data analysis, ““better monitor application performance,”  enable content to be published exceptionally quickly, and have “powerful API.”

Employees of Spotify (NYSE:SPOT), which uses Fastly, said that the company’s system enables quick yet “intelligent” usage and individualized targeting.

Based on my examination of reviews about Cloudfare’s offerings, I believe that its customers value them mainly for their ease of use, speed, affordability and strong protection against security threats.

For example, last November, reviewing Cloudflare on Gartner’s website, the CEO of SE Web Mechanics wrote “CloudFlare mirrors the website so the human (and bot) traffic is on the mirror, not the server, delivering faster page speeds and better uptime. We also get alerts from CloudFlare for any issues that need to be checked.” Another user, a technology manager at Happ Coach, praised Cloudflare for its ease of use, strong security tools, affordability and speed.

However, I did not see indications that Cloudflare’s products have the revolutionary capabilities that Fastly offers.

The Bottom Line on NET Stock

Cloudflare’s offerings seem to be excellent for small businesses, and the company is likely to grow rapidly going forward.

But NET stock is trading at an incredible 42 times analysts’ average 2020 sales estimate and carrys hefty market capitalization of  $17 billion. Meanwhile, Fastly is greatly improving its security capabilities and looks more appealing for larger businesses. Cloudflare is a sell at this point.

On the date of publication, Larry Ramer held a long position in Fastly. 

Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been Roku, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.

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