Edge computing heavyweight Cloudflare (NYSE:NET) stock has been sliding since Nov. 18, the day NET stock hit a record high of $221.64 intraday. Part of the reason has been the phishing attack and theft of $120 million worth cryptocurrencies suffered by BadgerDAO, a decentralized finance (DeFi) platform.
Badger cited, it “was the result of a maliciously injected snippet provided by Cloudflare Workers. Cloudflare Workers is an interface to run scripts that operate on and alter web traffic as it flows through Cloudflare proxies.”
In the past month NET stock is down 32% and now trading around $140. Yet, despite the recent decline, shares are up close to 83% year to date.
Cloudflare has been a top performer since its initial public offering in September 2019. In the content delivery network sector, it dominates the market with a share of almost 40%. Among its competitors are Akamai Technologies (NASDAQ:AKAM), Amazon’s (NASDAQ:AMZN) CloudFront, Bootstrap CDN, Fastly (NYSE:FSLY), Meta Platforms (NASDAQ:FB) and Zscaler (NASDAQ:ZS), among others.
Wall Street continues to highlight Cloudflare’s long-term growth potential. However, NET stock may not be able to recover its recent losses immediately.
How Quarterly Results Came
Founded in 2009, the San Francisco–based Cloudflare provides global cloud-based edge-computing and web security systems. Its customers rely on the company for enhanced performance and reliability of Internet applications.
Management issued Q3 financial results in early November, which showed better-than-expected revenue and earnings. Revenue of $172.3 million meant a growth of 51% from a year ago.
Non-GAAP net income of $1.4 million translated into diluted earnings of zero per share. In the prior-year quarter non-GAAP net loss and loss per share were -$5.8 million and -2 cents, respectively. Cash and available-for-sale securities ended the quarter at $1.8 billion.
“Our strong growth and efficiency also propelled us to reach profitability this quarter, achieving that milestone a year ahead of our original timeline,” CEO Matthew Prince said. “We’re laser focused on investing profits back into our business, continuing to fuel our innovation machine, and supporting even more global organizations as they plug into our network platform.”
Analysts noted the growth in the number of large customers, i.e., those that bring a revenue of over $100,000 per annum. With the additional 170 enterprise clients in the quarter, the total number of large customers is over 1,250, up 71% from the previous year. Looking ahead, management raised the 2021 fiscal year revenue guidance from previous quarter’s guidance of $629-$633 million to between $647-$648 million.
Adding NET Stock to Portfolios
Among 17 analysts polled, Cloudflare stock currently has a “buy” rating. Also, the consensus of 14 analysts for a 12-month median price target stands at $220, implying a 50% upside potential from current levels. The 12-month median price estimate is between $144 and $250.
NET shares trade at 69x trailing sales and 49.8x book value. These metrics imply that the stock trades at lofty valuations, despite the recent pullback. By comparison, its peers Akamai Technologies, Fastly, and Zscaler currently trade at 5.53x, 13.47x, and 55.39x sales value, respectively.
The content delivery network market is expected to grow at a compound annual growth rate of over 30% from 2021 to 2026, reaching “a market size of $73.008 billion by 2026, increasing from $11.473 billion in 2019,” according to a recent report.
Cloudflare is a solid company with significant long-term growth prospects in the CDN space. However, it is not yet profitable. And as the Federal Reserve gets ready to increase interest rates, high-growth stocks are likely to take a breather.
Therefore, long-term investors, who do not already have NET shares, should consider waiting for a better entry point. A further decline toward the $120 level would improve the margin of safety.
Alternatively, interested readers could consider buying an exchange-traded fund that provides exposure to NET stock as a holding. Examples include the Defiance Next Gen Big Data ETF (NYSEARCA:BIGY), the First Trust NASDAQ Cybersecurity ETF (NASDAQ:CIBR), the Simplify Volt Cloud and Cybersecurity Disruption ETF (NYSEARCA:VCLO), and the Wedbush ETFMG Global Cloud Technology ETF (NYSEARCA:IVES).
The Bottom Line
Cloudflare has achieved significant growth through innovative products and the acquisition of new customers. It offers basic versions of new services free to increase the number of clients. Management then introduces enhanced versions of these new products to subscribers.
Today, the company has more than 132,000 paying customers worldwide. In addition to launching new services, the Cloudflare recently announced it will acquire Zaraz, a startup whose offering can swiftly accelerate website speed and performance.
Yet despite additional growth prospects amid digital transition, NET stock price already reflects a big part of this future optimism. Therefore, Cloudflare share price could continue to come under pressure in the coming weeks.
As legendary investor Warren Buffett suggests, “Just buy something for less than it’s worth.”
On the date of publication, Tezcan Gecgil 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.
Tezcan Gecgil, Ph.D., has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all three levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.
