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Cloudflare Stock Isn’t Great for Investors Looking to Profit Soon

This is the best of times for Cloudflare (NASDAQ:NET) stock. It’s the worst of times to own Cloudflare stock.

An illustration a Cloudflare (NET) logo is seen displayed on a smartphone
Source: IgorGolovniov / Shutterstock.com

Cloudflare is growing like a weed. Revenue for 2021 topped that of 2020 within three quarters.

When the full year is tallied on Feb. 10, growth should come in at 43%.

Unfortunately, investors are no longer buying growth. They want earnings. In the last two months the price of Cloudflare stock has fallen by more than half.

It trades today at about $93. That still leaves a market cap of $30.4 billion on 2021 revenue of under $650 million, with a fourth-quarter loss expected. Cloudflare stock may never be cheap.

For those who listened to me when growth was in, these are dark days. Should we fold our hands or wait for the market weather to clear?

The Bull Case for NET Stock

Everything that was true about Cloudflare in September remains true.

Cloudflare is a leader in computer security, beating even the largest Distributed Denial of Service (DDoS) attacks. Cloudflare says these rose 175% in just the fourth quarter.

Cloudflare is also a content delivery network, caching files close to users to provide a “Network as a Service.”

It has nodes in 250 cities, which it can spin up data quickly, on an ad-hoc basis. This makes it a leader in Web3, the decentralized cloud structure I’ve called the cloudless cloud,” because Cloudflare doesn’t have to own infrastructure in order to sell it.

If NET stock just has a market problem, then bulls like Guardian Capital (and me) are right to be pushing the stock.

Short-term problems, unlike long-term problems, represent a buying opportunity for those who measure gains in years rather than days.

Other Problems

Cloudflare has other problems that are more troubling. Some are political.

While it has won in court over refusing to take down customer content based on copyright claims, it’s still accused of selling services to “bad actors” on the dark web.

The situation has escalated to the point where the European Union will soon create its own Domain Name System (DNS) so governments can cut suspect sites off its Web.

Cloudflare CEO Matthew Prince blames carriers who don’t validate network routes, like Verizon (NYSE:VZ), for growing problems.

Being on the bleeding edge of change, like Web3, also puts Cloudflare’s policies into the crosshairs of critics. Standing up for customers’ rights without attention to who those customers are could get Cloudflare into trouble.

Prince revels in the attention. When Cloudflare announced its first cloud storage product recently, he called it R2, a jibe at Amazon.Com (NASDAQ:AMZN) Web Services’ S3.

The pitch for R2 is that it will eliminate egress fees, which Amazon charges for pulling data out of its cloud.

For now, analysts remain on Cloudflare’s side. While one analyst at Tipranks is saying sell, the average price target is nearly double its January 20 price.

The Bottom Line

Don’t put all your money in Cloudflare. I didn’t.

I’m down by one-third in Cloudflare shares I bought in December. Right now, I’m more inclined to buy more than to sell any. That would drop my price per share basis and bring profits closer.

My timing was bad on this one. I goofed. The macro-environment matters, even with growth stocks. I doubt I’ll break even on my Cloudflare investment until 2023.

If you can’t wait like that on an investment, avoid stocks like Cloudflare. Volatility works both ways at the bleeding edge of change. But you do want some money on that bleeding edge because change keeps accelerating.

On the date of publication, Dana Blankenhorn held long positions in AMZN and NET. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com, tweet him at @danablankenhorn.


Article printed from InvestorPlace Media, https://investorplace.com/2022/01/net-stock-isnt-great-for-investors-looking-to-profit-soon/.

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