This is the best of times for Cloudflare (NASDAQ:NET) stock. It’s the worst of times to own Cloudflare stock.
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 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.
Short-term problems, unlike long-term problems, represent a buying opportunity for those who measure gains in years rather than days.
Cloudflare has other problems that are more troubling. Some are political.
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.
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.
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 email@example.com, tweet him at @danablankenhorn.