The Future Looks Brighter and Brighter for Cloudflare Stock

After the Cloudflare (NYSE:NET) share price nearly quadrupled in the last year, Cloudflare stock has a good chance of continuing its uptrend.

A close-up of the Cloudflare (NET) logo at the company headquarters in California.

Source: Sundry Photography / Shutterstock.com

Cloudfare stock has benefitted from strong demand for corporate security and networking in the cloud, and as the firm advertises on its website, it shows no sign of letting up.

As companies continue to encourage their staff to work from home, Cloudflare stock will keep rising. Identity management and endpoint security needs continue to make this a viable and even preferred cloud play.

Markets briefly fell before the U.S. elections, creating an entry point on Cloudflare stock in September. In early-October, Cloudflare’s launch of Cloudflare One added around $20 to its stock price on heavy trading volume.

The product release is a turning point. It is a new platform that uses a Zero Trust security model. This simplifies and increases the reliability of the authentication process. Cloudflare’s corporate customers may protect its workforce regardless of the device, data, and application used.

“With Cloudflare One, we’re giving organizations of any size the power to solve their security and networking needs seamlessly, no matter how their business needs shift,” Co-Chief Executive officer Matthew Prince said.

Moving from a castle-and-moat approach in security to this model is a seismic shift. In practical terms, employees no longer need to connect to the office on slow Virtual Private Networks.

Instead, the Zero Trust approach will offer a fast and safe connection to workplace applications.

Strong Q3 Report and Cloudflare Stock

In the third quarter, Cloudflare posted revenue growing by 54% year-on-year to $114.2 million.

On a valuation comparison, Snowflake (NYSE:SNOW) posted similar revenue levels but has a market capitalization that is around five times bigger than that of Cloudflare. The company lost 9 cents a share on a GAAP basis and lost 2 cents on a non-GAAP measure. This is still an improvement from last year’s results.

Gross profit topped 487.2 million, or a 76.3% gross margin. The company reached a milestone of crossing 100,000 paying customers in the period. After over a dozen new products and features launched in the quarter, demand strengthened.

Cloudflare forecast Q4 revenue in the range of $117.5 million to $118.5 million. It expects to lose between three and four cents a share. For the full-year fiscal 2020, total revenue will top 4423.5 million. Non-GAAP EPS will be a negative $0.13 to $0.12.

Upside

Investors may build a five-year discounted cash flow revenue exit model to estimate Cloudflare’s fair value. Apply the following metrics:

Metrics Range Conclusion
Discount Rate 8.0% – 7.0% 7.50%
Terminal Revenue Multiple 12.5x – 15.0x 13.0x
Fair Value $78.30 – $96.66 $82.78

Model courtesy of finbox

Note that readers may click on the model link to change the metrics and to recalculate the fair value.

Furthermore, assume revenue growth as follows:

Fiscal Years Ending 19-Dec 20-Dec 21-Dec 22-Dec 23-Dec 24-Dec
Revenue 287 423 635 1,111 1,667 2,500
% Growth 49.00% 47.50% 50.00% 75.00% 50.00% 50.00%
EBITDA -85 11 27 167 417 625
% of Revenue -29.70% 2.50% 4.30% 15.00% 25.00% 25.00%

in USD millions

The fair value of over $80 depends on Cloudflare continuing to grow its online presence over the next several years. Eventually, a vaccine for the Covid-19 virus will let companies bring workers back to work.

This should not slow the need for supporting remote workers. In the next year, corporations will need to let staff work at home and physically at the office.

Protection from Cyber-attacks

Companies are already facing more cyber-attacks. In Q3, Cloudflare said it saw a large number of customers coming under cyberattacks. So, by putting its customers behind its Magic Transit product, they were protected.

In the near-term, expect continued product enhancements raising customer satisfaction and attracting more business. The company may lift its forecast for 2021 the next time it reports quarterly results.

Disclosure: On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.


Article printed from InvestorPlace Media, https://investorplace.com/2020/12/the-future-looks-brighter-and-brighter-for-cloudflare-stock/.

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