Cloudflare Is Cheap to Growth Investors But Expensive to Value Buyers

NET stock - Cloudflare Is Cheap to Growth Investors But Expensive to Value Buyers

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  • Cloudflare (NET), the cloud-based security technology company, posted stellar Q4 numbers.
  • This pushed analysts’ revenue and earnings forecasts higher for 2022 and gave NET stock a rebound recently.
  • If Cloudflare keeps piling on revenue the stock could be expected to move to its former heights.

Cloudflare (NYSE:NET) is down 9% year-to-date (YTD) at $114.40. But this is after NET stock hit a trough of $80.07 on Jan. 6 and another recent trough of $84.16 on March 14.

Investors can expect that NET stock might rise even further based on its valuation.

Ticker Company Current Price
NET Cloudflare $114.40

Where Things Stand at Cloudflare

I wrote about this trough price on Jan. 7, in my article, “Cloudflare Stock is a Bargain at More Than Half off Its Highs.” I argued that the stock’s valuation was interesting given its expected revenue for 2022. But that was before the 2022 revenue figures came out. At the time the Street estimated revenue would be around $647 to $648 million.

On Feb. 10, the actual numbers were $656 million for 2022. This exceeded expectations. NET stock shot up since then.

Moreover, forecasts for 2023 revenue have shot up as well. As you can see in my prior article, analysts surveyed by Refinitiv (as seen in Yahoo! Finance) were predicting 2022 revenue of $888.4 million. But now those same analysts now forecast sales of $931.12 million.

That obviously represents much higher growth over 2022 than even previously forecast.

Higher Revenue Forecasts

For example, at the end of January, analysts were forecasting 2022 revenue growth of over 35%. But now they expect 41.9% higher revenue in 2022 over 2021.

The point here is that they assume that Cloudflare’s cloud-based security products are selling on fire like hotcakes, so to speak. One reason for this is that the company is expanding quickly overseas. In addition, they are also seeing customers increase their spending at the firm for more than one product.

For example, the CEO, Matthew Prince, gave an example of a Fortune 500 financial services firm that:

“[E]xpanded their use of our platform by signing a $900,000 three-year expansion deal, bringing their annual contract value to over $1.5 million. They described it as “future proof”. It’s an example of us bundling our platform to give them access to a broad set of our features while minimizing procurement friction.”

What Analysts Say About NET Stock

RBC Capital analyst Matthew Hedberg said in a report that Cloudflare had strong revenue growth, according to Investors Business Daily. It showed “strong enterprise momentum with large customers (more than $100,000) growing +71% and now representing 54% of revenue vs. 46% in 2020.”

IBD said that Jefferies analyst Brent Till had a similar view. He said that Cloudflare now had “1,416 customers spending over $100,000 (annual contract value).” That provides a huge source of stable revenue growth and potential contract upsell opportunities.

As you might imagine, analysts’ price targets are now substantially higher than today’s price. For example, the average at TipRanks‘ survey of 17 analysts is $150.29, or over 28.5% higher than the price today.

Similarly, the Refinitiv survey (seen at Yahoo! Finance) of 21 analysts is $158.86, or 33.5% over today’s price.

What Investors Should Do With NET Stock

This is not a value stock. Its price-to-sales (P/S) multiple is 41 times for 2022 estimates and about 31 times for 2023 revenue forecasts. That is typically high for where a company’s price-to-earnings (P/E) multiple will be, even for a growth stock.

But if you are open to nosebleed valuations, and believe that a five-year outlook is worth investing in now buy NET stock. You will have to assume that the stock is cheap on a five-year outlook. And that could mean a lot of volatility until the long-term happens.

As a result, to growth investors, NET stock looks worth investing in, but to value buyers, this stock is too high.

On the date of publication, Mark Hake did not hold (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 Publishing Guidelines.

Mark Hake writes about personal finance on, and

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