Is Cloudflare a Good, Bad or Ugly Buy in 2021?

Last year, much of our concern focused on the threat of the novel coronavirus pandemic. While we put on masks and kept six feet away from each other, different stressors took a back seat. That said, demand for cybersecurity remained strong, as more companies shifted over to remote work and the number of cyberattacks increased dramatically. All of this helped power Cloudflare (NYSE:NET) stock up more than 300% in 2020.

Close up of Cloudflare logo at the Company's headquarters

Source: Sundry Photography / Shutterstock.com

However, the story is a little different for this stock heading into the second half of 2021. In fact, NET stock has only managed to chart about an 8% gain year to date (YTD).

You might attribute much of this lost luster to the general tech selloff a few weeks ago. Broadly speaking, tech stocks have been running ridiculously high, especially during the pandemic. However, not all tech stocks merit extreme caution in today’s less-than-certain market environment.

That brings us to an important question — is Cloudflare stock still a buy?

There are a few reasons why you shouldn’t count it out just yet. But there are also a few concerns to keep in mind. So, let’s take a closer look.

NET Stock: The Good…

Things are getting back to normal. We’re starting to take off the masks. Some of us are even interacting with others again more comfortably. But there’s at least one issue that likely won’t improve in the new normal. That is, the rate of cyberattacks on companies, individuals and even governments.

Experts report that the number of cyberattacks climbed 300% over the past year, with “‘no sign’ of any slowdown.” As glum as that may be for cyber victims, it’s great news for NET stock. After all, Cloudflare has a solid position in a space that will never fade from importance: secure internet infrastructure services. Specifically, it supports more than 25 million “Internet properties” with a unique network product, where it “provides content and other services as close to you as possible, so you get the information as fast as possible.”

You can dig further down the tech rabbit hole on its website if you want the full picture. But the super-simplified version? It creates nearby bridges between various devices to help transfer internet content quickly and safely.

Visitors “will access your website by being physically redirected to the closest server” via its VPN-like network. Plus, the fact that Cloudflare’s offerings don’t require intense background knowledge in networking and webmastery is another unique perk to its services (though they are adaptable to more advanced users).

The emphasis on speed while retaining security is what largely separates Cloudflare from the pack. Both of these traits combined are vital for internet-based businesses, small and large.

And for anyone who forgot about potent cyber threats, the recent attack on the Colonial Pipeline certainly gave us a strong reminder of just how fragile things are. (Just ask anyone on the East Coast who wasn’t able to get any gas for a few days).

As such, the appeal of Cloudflare’s offerings is seemingly perpetual. Our increasingly internet-obsessed world will always thirst for what it offers. And, remember, numerous businesses are adopting virtual work environments altogether. That’s even more potential customers ahead.

Add it all up and there’s plenty of reason to be optimistic about NET stock in the long run. But don’t just take my word for it. As The Motely Fool’s Trevor Jennewine explains, “management believes the company’s market opportunity will grow at 9% per year, rising from $72 billion in 2020 to $100 billion by 2024. But Cloudflare’s revenue is growing much faster, meaning the company is gaining market share.”

If NET’s success continues, it ought to remain a promising growth stock in the years ahead. While the pandemic accelerated its growth astronomically, there’s still reason to think it will remain strong as time goes by.

The Bad…

That said, as great as this all sounds, the bullish case for Cloudflare stock isn’t without a blemish or two.

One of the main concerns investors might have is that this could be one of those over-hyped, over-valued tech stocks so many experts are concerned about. That is, NET could be part of the whole “tech-stock bubble” narrative that many have been discussing lately.

This worry isn’t unfounded. After a 300%-plus jump in 2020, it’s by no means cheap. Plus, NET stock has been fairly volatile throughout 2021.

For example, over the past three months alone, it has taken a massive 18% dive, only to climb back 40% higher and dip down again. Over the past five days, it’s up nearly 11%. Of course, there are some legitimate explanations for this rollercoaster. Namely, the aforementioned tech dip and a positive first-quarter earnings report led to the recent ping-ponging.

But none of this helps Cloudflare evade the poor valuation some bears accuse it of having.

NET Stock: The Ugly?

Ultimately, I don’t think there’s really anything “ugly” about NET stock.

True, the 2020 hype may have faded and it might be expensive from a valuation perspective, but there’s plenty to like about Cloudflare from a longer-term view.

Remember — our need for speed and safety in the internet age is undying. Plus, the amount of businesses and individuals that require its services is only growing thanks to the pandemic. (Though, admittedly, the adoption of remote work will likely not be as significant as it was during quarantine).

So, altogether I think there are a few key questions you need to consider when looking at Cloudflare:

  • How much volatility are you willing to stomach? NET stock is a growth stock. With that comes plenty of ups and downs. And a whole lot of risk.
  • How much growth potential do you think remains? It climbed more than 300% last year. Can it make another massive climb like that again?
  • Is its technology advanced enough to keep it competitive with others in the space? For example, big dogs like Amazon (NASDAQ:AMZN) are barking at its heels.

If you think Cloudflare has plenty more room to run over the next few years, then I’d consider the rough ride in 2021 as a solid opportunity. Of course, I’m not sure that we’re due for another 300% gain anytime soon. But I do think it has enough going for it that it can mange to inch higher over a longer timeframe. That’s especially true given its unique network design, which makes it the “fastest global cloud network for web applications.”

Robert Waldo is a web editor for InvestorPlace.com. On the date of publication, he did not hold a position (either directly or indirectly) any security mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.


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