Cloudflare (NYSE:NET) is firing on all cylinders. Its underlying cloud services business continues to benefit from strong demand. Unfortunately, this may mean little in the short term when it comes to NET stock.
With changes in market trends, growth stocks have fallen out of favor. Selling off sharply from November until year’s end, this sell-off has carried on into the new year. In the case of Cloudflare, it meant another 25% dive since Jan. 3, atop its late-year declines. In all, it’s down 55.7% from its $221.64 per share high, hit on Nov. 18.
This of course has been painful for investors holding the stock. To make matters worse, market conditions may continue to be out of its favor in the near-term. However, is this sign its time to sell, or, if you don’t own it, avoid it?
Not so fast. Instead, now may be the time to buy/add to a position. With its strong fundamentals, bullishness will return, once growth plays are back in favor. Crushing it in its existing lines of business, it’s move into an even larger segment of cloud services could sustain its status as a growth machine for years to come.
The Latest on NET Stock
Although its shares have made a big move lower over the past two months, it’s important to note that little has changed with the “story” behind Cloudflare. As seen when it last reported quarterly results, revenue keeps growing at an above-average clip. Strong numbers like these prove wrong the skeptics who believed its high level of growth was entirely due to “pandemic tailwinds” set to cool as the recovery continues.
Since these numbers hit the street, nothing has come out to indicate this growth story is due to come to screeching halt. For its next earnings release (Feb. 10), the company (based on its latest guidance) expects to report between $184 to $185 million in quarterly revenue. In other words, year-over-year growth of between 46.1% and 46.9%. A slight deceleration from the prior quarter, but nothing that’s cause for alarm.
No, it’s not the company’s performance that’s driving NET stock lower. What’s playing out today is entirely due to changes in the market environment. Scores of similar types of plays (high-growth tech stocks) have been hammered. This is due to investors cycling out of this space.
This trend could carry on in the months ahead, as the factors driving it continue to have an impact. With this, the stock more likely than not will remain volatile. Again though, I wouldn’t take this as a sign to steer clear. In fact, while the market is selling, you may want to be buying.
Cloudflare and Its Fourth Cloud Ambitions
When it comes to NET stock, much of the focus is on the company’s content delivery network (CDN) and cybersecurity businesses. As demand for both services remains robust, both segments will continue to thrive.
But the company isn’t limiting itself just to these two areas. As CEO Matthew Prince put in an interview last fall, Cloudflare is “aiming to be the fourth major public cloud.” With the launch of its R2 cloud storage service, it is setting its sights much higher by taking on the tech powerhouses that dominate the space.
Now, it’s going to be several years until the company gets to a point where it’s considered the “fourth cloud.” Yet, given its successful pivot to other cloud services segments, I wouldn’t discount its chances. Think about how it successfully moved into network security, from its start in CDN. The same thing could play out here, with its latest expansion into new cloud frontiers.
Atop the strong growth from its existing lines of business, Cloudflare stands to continue scaling up at a rapid pace for years to come.
The Bottom Line on NET Stock
What’s playing out today in the market is a temporary challenge for Cloudflare shares. It may persist in the short term, but in time it’ll clear up.
More importantly, it has provided investors an opportunity to dive in at a more than favorable entry point. Based on its past performance, when it next releases results next month, the disconnect between its underlying value and the market’s current perception of it will become all the more apparent.
Pushed back even further in recent weeks by changing market trends, at current prices (around $100 per share), NET stock has fallen to a fantastic entry point. Now may be the time to start pouncing on it while it still remains on sale.
NET stock earns a “B” rating in my Portfolio Grader.
On the date of publication, Louis Navellier had a long position in NET. Louis Navellier did not have (either directly or indirectly) any other positions in the securities mentioned in this article.
The InvestorPlace Research Staff member primarily responsible for this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
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