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Cloudflare Is Burning Cash, But It Also Still Has a Ton of Room to Run

After a 133% gain year-to-date, does Cloudflare (NYSE:NET) stock have any gas left in the tank? I think it may.

A close-up of the Cloudflare (NET) logo at the company headquarters in California.
Source: Sundry Photography / Shutterstock.com

It’s been an incredibly successful year for San Francisco-based Cloudflare. Having more than doubled, NET stock has proved to be one of the best performing securities of 2021, and its gains have steadily accelerated as the year has progressed.

In the last six months, the company’s share price has risen 110%, outpacing other cybersecurity stocks and most technology stocks during that timeframe.

Given its red hot run, some analysts are now shouting that Cloudflare shares are overextended and due for a pullback. Yet the consensus forecast of 14 professional analysts who cover the company is for the stock to continue climbing.

The median price target on the shares is now $220, implying another 26% gain from the current price of just over $174.

Most recently, investment bank Cowen (NASDAQ:COWN) placed an “outperform” rating on NET stock with a Street high price target of $250 per share.

Different Offering 

Cloudflare has distinguished itself from other cybersecurity companies by focusing its innovative technology on the internet.

Cloudflare says its mission is to “build a better internet,” and, to that end, it focuses its suite of products on improving the security and speed of browsing on the internet.

Cloudflare began life in 2009 as a content delivery network (CDN) that was entirely focused on making the websites its technology supports quicker. It has since grown and expanded into cybersecurity and specifically edge computing, which moves data and software out of the cloud so that it can be located closer to end-users.

Owing to strong demand for its products, Cloudflare’s growth has been exceptional. The company today has 132,000 paying customers in more than 100 countries around the world.

Cloudflare has averaged 25% annual customer growth since the third quarter of 2018. The company has also grown its number of large customers with contracts worth more than $100,000 by 69% annually since 2018.

Nearly half (47%) of Cloudflare’s revenue is now generated outside the U.S., making it a truly global enterprise. This impressive growth is what has kept NET stock buoyant.

Great Financial Results

Of course, Wall Street is all about the bottom line, and analysts have been applauding Cloudflare’s quarterly results. In this year’s third quarter, Cloudflare’s revenue grew 51% from a year ago to $172 million. Also in Q3, the company beat its own internal revenue guidance by 4% and raised its earnings guidance by $0.03 per share.

Looking ahead, Cloudflare raised its full-year revenue guidance to $647.5 million from $631 million previously. Investors love what they’re seeing and have continued pushing NET stock higher as a result.

If there’s one drawback with Cloudflare, it is that the company is not yet profitable and continues to bleed money. In the third quarter, the company lost $107 million, representing 80% of its gross profit.

Cloudflare’s free cash flow is also negative. However, the company states that the losses are the price to be paid for its massive growth and that profitability will come in due time, although an exact timeline for producing profits hasn’t been announced.

Still, Cloudflare continues to see a huge market for its products. Back in 2018, the company estimated its addressable market at $32 billion. Now it sees that addressable market reaching $100 billion by 2024.

Buy NET Stock For Its Growth Potential

Cloudflare’s stock currently trades at 113 times sales, making it extremely expensive. That said, the valuation is largely justified by the company’s gargantuan growth and the massive appreciation of its share price.

The run-up in Cloudflare’s stock looks set to continue as the company continues to attract new customers and expand globally. While it is not yet profitable, that shouldn’t be overly concerning given the torrid pace at which the company is expanding.

With Wall Street remaining bullish on the stock and forecasting more than 25% gains over the next 12 months, NET stock is a buy.

Disclosure: On the date of publication, Joel Baglole did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Joel Baglole has been a business journalist for 20 years. He spent five years as a staff reporter at The Wall Street Journal, and has also written for The Washington Post and Toronto Star newspapers, as well as financial websites such as The Motley Fool and Investopedia.


Article printed from InvestorPlace Media, https://investorplace.com/2021/12/cloudflare-is-burning-cash-but-it-also-still-has-a-ton-of-room-to-run/.

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