In recent years and especially following the onset of the coronavirus pandemic, business enterprises must not only concern themselves with making money but also making money in the right way. A false step in terms of social messaging could lead to consequences, which brings us to Cloudflare (NYSE:NET). Its injection into the present geopolitical flashpoint may bring risks to NET stock.
Since the Russian invasion of Ukraine, a growing chorus of global voices have urged companies — particularly blue chips and otherwise well-known entities — to stop doing business in Russia. While the moral directive seems to be the overriding narrative, a fundamental catalyst also exists; namely, the Russian market has become toxic.
Further, the more violent the conflict becomes, the more likely it is that corporations still deliberately tied to Russia could face long-term consequences.
And that’s why Cloudflare’s decision to stay in Russia presents an ambiguous case for NET stock. On the one hand, the web infrastructure and security firm can’t afford to lose business during a trying time for the world. Even before the geopolitical flashpoint, people were suffering from soaring consumer inflation. Now’s not the ideal time to grow a conscience.
But on the other hand, being on the wrong side of history could lead to long-term consequences for the value of NET stock. While Cloudflare is a very intriguing name — especially because of the impact of Covid-19 — it’s not the only web infrastructure play in town.
If Americans are willing to pay $7 for gasoline, they might pay for morally aware tech firms.
NET Stock Thrust into the Ugliness
The past month has been painful for NET stock investors. On Feb. 10 came the news that fourth-quarter earnings per share were 44% below analysts’ consensus estimates. Two weeks later came the start of the Ukraine invasion. Year to date, Cloudfare stock has lost 32.5% of its value (see chart below).
At a time when people are looking for greater authenticity in society, Cloudflare is taking a bold step with its decision. It’s not merely about the company’s decision to keep open certain services in Russia that’s raised eyebrows. Instead, it’s also the explanation of doing so by Cloudflare CEO Matthew Prince.
According to his statement, Prince mentioned that as his company provides cybersecurity mechanisms to protect Ukraine against digital assaults, he also stated that “Russia needs more internet access, not less.”
The reason? “As the conflict has continued, we’ve seen a dramatic increase in requests from Russian networks to worldwide media, reflecting a desire by ordinary Russian citizens to see world news beyond that provided within Russia.”
This sounds reasonable. So, can NET stock get away with this delicate balancing act?
As I research the broader picture, I’m beginning to have my doubts. According to The Washington Post, 58% of Russians support the invasion of Ukraine. That’s not an insignificant figure. Let’s also not forget that Putin’s strongman image has historically resonated deeply with Russians.
Is it possible that the Russians are having a modest change of heart because they’re feeling the pain of sanctions? Personally, I don’t think you can dismiss this counterargument entirely.
Indeed, the issue for NET stock is that international anger could easily point to well-founded data that demonstrates Putin’s popularity. So the idea that the Russians need Cloudflare’s services so that they could get the truth of the matter may seem disingenuous to critical thinkers.
After all, when the Russians had unfettered access to western goods, services and media, they overwhelmingly chose Putin. Are things really that much different today?
Don’t Shoot the Messenger
The reason I’m bringing this up is not to weigh in one way or the other on Russian politics. I could care less. Rather, we in the west live in a world where all opinions are cherished and celebrated, so long as they are the right opinions.
And right now, the right opinion is pro-Ukraine. I mean that both literally and figuratively. Yes, even certain Putin-leaning Republicans have now pivoted onto the side of the Ukrainians, per The New York Times.
What does this all mean for NET stock? Cloudflare, by its own admission, will keep at least some of its lights on in Russia, which is on the wrong side of the opinion spectrum. Again, in the context of this analysis, I’m not saying that Cloudflare is actually wrong; I’m just pointing out that society at large views it as the wrong opinion.
It takes nerve to deliberately go against the grain of public sentiment, which is why I must give Cloudfare CEO Prince some credit for that. With the outrage mob ready to outrage outrageously, I must admit that I’m a little nervous for NET stock. I’d approach it cautiously.
On the date of publication, Josh Enomoto did not have (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 InvestorPlace.com Publishing Guidelines.