In the last month, Content Delivery Network stocks fell hard failing to exceed expectations. Cloudflare (NYSE:NET) is somewhat of a relative exception. NET stock has unfavorable valuations for a good reason. Its prospects are better than its competitors.
Investors should keep a close eye on Cloudflare, especially if the stock falls enough to create a better entry price.
The October correction would partly explain the drop in Cloudflare in the last month. Fastly’s (NYSE:FSLY) disappointing outlook did not help, either.
On Oct. 28, Fastly posted revenue growth of 42.6% year-on-year to $71 million. It made only $800,000 in EBITDA, an improvement from the $5 million loss last year. Because total customer count only rose modestly from 1,951 in Q2/2020 to 2,047 in the third quarter, shares sold off.
Akamai Technologies (NASDAQ:AKAM) reported strong quarterly results on Oct. 27 but shareholders expected more. Akamai benefited from sustained high traffic levels for its Edge platform. Demand for its security products also helped the company beat analyst expectations.
So, if markets are ignoring companies that are still growing, Cloudflare shares will probably underperform in the near-term.
A Closer Look at NET Stock
On Oct. 12, Cloudflare announced Cloudflare One. This platform secures and connects companies and their remote teams anywhere and on any device. Using a Zero Trust security model, the company facilitates a workforce’s network-as-a-service solution.
Working from home is giving rise to increased hacking attacks. Businesses may protect themselves by securing devices, applications, and networks. Co-founder and CEO Matthew Prince said that its product will move its customers away from the legacy corporate network on to a secure, “work-from-anywhere economy.”
In its press release, the company said that remote employees get a sure connection every time on Cloudflare One. It protects customers from zero-day attacks through Cloudflare’s “remote browser isolation technology creates a gap between a user’s browser and endpoint.”
All of this technical jargon will appeal to investors. For example, CrowdStrike (NASDAQ:CRWD) traded at a market capitalization of above $30 billion recently. Conversely, Cloudflare is valued at around half that level.
Fair Value
On Wall Street, analysts have a neutral price target, although most of them rate the stock as a “buy.” The average price target is $52.50, according to data compiled by Tipranks.
If seasonality patterns are a guide, then NET stock should rise in November, drop by over 10% next month, and then rally from January to March 2021.
Last quarter, Cloudflare signed deals with larger customers. It had 15% of the Fortune 1000 companies using its product. As long as companies replace their on-premise, hardware-based solution and embrace digital transformation, this software infrastructure firm will keep reporting impressive revenue growth for years to come.
There are potential near-term risks that investors should watch for. Limelight Networks (NASDAQ:LLNW) posted a disappointing third quarter.
Revenue grew 15% to $59.2 million, a record for this small company. Yet it lost $4 million on a GAAP basis. So, if Limelight is facing stiff competition, it may cut prices or lower its quality to take market share from companies like Cloudflare. Akamai and Fastly may do the same.
As long as the CDN market does not become a commodity and Cloudflare differentiates itself from the others, margins should not fall. Cloudflare’s emphasis on security on the cloud will prevent it from competing solely on price.
Your Takeaway
The software infrastructure stocks enjoyed a year-long rally, rewarding investors who timed the exit and sold at the peak. If market volatility continues and sellers keep booking profits, then Cloudflare will underperform. Readers who still hold the stock need not do anything. The long-term prospects are getting stronger.
Disclosure: On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.
