Cloudflare Stock Is a Buy While Unnecessary Worries Continue to Subside

After a rough start to 2022, things are finally settling down for Cloudflare (NYSE:NET). After making two brief trips below $100 per share, NET stock has bounced back to triple-digit prices.

Close up of Cloudflare logo at the Company's headquarters

Source: Sundry Photography / Shutterstock.com

Sure, much of this bottoming out is market driven. After shifting out of tech stocks, and into value plays, investors have calmed down when it comes to their concerns about rising interest rates, and their potential impact on growth plays.

But Cloudflare  has had quite a few positive developments since the start of February. Its results for the fourth quarter (Q4, ending December 31, 2021) came in strong. Also, the cloud security and content delivery network (CDN) services provider has announced two acquisitions. Both these deals will bolster its existing zero-trust security offering, Cloudflare One.

This news may only be resulting in a slight bounce back from its recent lows. Yet as the uncertainties that have jolted the markets since late last year begin to ease? Although it may happen slowly, shares will start to make a recovery.

The Latest With NET Stock

If market conditions were different, the recent news we’ve seen with Cloudflare would be having a far greater impact in its stock price performance.

That is, a strong earnings beat, plus guidance for the current quarter that’s above Wall Street estimates, would have undoubtedly produced a sustained move higher for NET stock. Of course, we don’t get to choose the market we get; we play the hand we’re dealt, as the saying goes.

They may be calming down, but investors are still on edge, as numerous uncertainties remain. This includes the much-discussed uncertainties about changes in monetary policy, and now worries related to geopolitics. Although these issues do not have a direct impact on Cloudflare’s operating performance, they are affecting the market’s willingness to jump back into shares.

The bad news is that this may keep shares at or near current price levels (around $119 per share) for a while. I wouldn’t rule out another temporary move back to the double-digits. The good news, however, is that its long-term prospects remain solid. With this, there’s a strong chance of it ultimately climbing back up to its high-water mark, before making a continued move to new highs.

Plenty to Sustain Cloudflare’s Valuation Before Its Recovery

I understand why near-term issues may make you hesitant to jump into NET stock right now. Given the big rotation out of tech stocks, and the company’s premium valuation, it may seem as if shares have far more room to fall from here.

Yet while Cloudflare may trade at both a high price-to-sales (P/S) ratio, and a high price-to-earnings (P/E) ratio, that doesn’t mean another big correction is due. There’s more than enough in play to allow it to sustain its current valuation for now.

With its strong year-over-year sales growth seen last quarter (54%) and last year (52%), and its upping of guidance, concerns about its rate of growth slowing down may be overblown. Demand for both its main offerings (CDN and cybersecurity) remains very strong. Again, like I mentioned above, the company is enhancing its zero-trust security platform, through two acquisitions.

First, its announced purchase of Vectrix, which will add modern cloud access security broker (CASB) functionality to its zero trust product. Second, announced just a few days back, its plans to purchase Area 1 Security. This startup, whose main product provides anti-phishing protection, will also further enhance the capabilities offered by Cloudflare’s cybersecurity unit.

The Verdict on NET Stock

Put simply, there’s more than enough in Cloudflare’s corner right now to enable it to at least hold steady. But besides the prospect of it inching back up, as concerns fade, keep something else in mind. Other catalysts stand to send it to new highs in the years ahead. Namely, long-term initiatives, like its plans to become “the fourth major public cloud.”

For now, this may sound more like a stretch goal. Only starting now to offer cloud storage, it still needs to prove itself. Three of the world’s largest tech companies dominate the space. Each of these competitors generates billions in annual revenue, and have market values running in the trillions.

Yet while Cloudflare is a small fry compared to these tech titans, don’t rule out its chances. It has made moves into larger segments of the cloud services space before. The company’s pivot to an even larger segment of the market could be just as successful.

Earning a “B” rating in my Portfolio Grader, as it hangs tight above $100 per share, now’s still a great time to build a position in NET stock.

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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