- Cloudflare (NET) is a battleground stock pitting multiple compressions versus secular growth
- Relative and pattern weakness in NET stock warns of larger correction
- A stock collar safeguards against bearish bad actors in NET shares
Economic stressors from here, there and everywhere have quickly resulted in a market rally that is under pressure this week. And Cloudflare (NYSE:NET) hasn’t been immune to the attack on risk assets. NET stock is down 6.85% in the past 5 days alone.
A de-risking of portfolios the past two sessions tied to growing global recession worries fueled by a Deutsche Bank warning, treasury inversions, mounting trouble from Covid-19 and Russia, as well as a more hawkish central bank policy, are taking a headline and price reprieve today.
Intraday, the S&P 500 and Nasdaq are mostly flat on the session after hitting two week lows and losses in excess of 2%. Amid the lull, cloud networking and security play NET stock is adding about 0.75%. But don’t be fooled into complacency.
With the broader market’s confirmed rally at risk, there is an increased chance for buyer’s remorse in Cloudflare at current prices. Today, let’s examine the pros and cons surrounding shares. I will then offer a strategy to better defend against unwanted bearish attacks.
Growth, Price Compression and Investor Depression
Investors that are positive on NET stock are almost uniformly bullish on the outfit’s two-tiered, secular growth story.
Shares of Cloudflare quickly made a name for themselves during the outset of the pandemic. This is owed to its Content Delivery Network (CDN). Amid lockdown orders, the business for providing faster online access and keeping websites safe from hackers saw demand explode.
No matter the future of lockdowns, the need for this type of service will only continue to grow. Attractively, Cloudflare also focuses on cybersecurity.
NET’s cybersecurity has been instrumental in helping employers put remote workforces safely at their desks, in cafes, and a variety of places while handling critical company information. And that way of life isn’t going away either.
With geopolitical tensions rising, risks posed by larger bad actors like Russia and North Korea are also increasingly good for NET’s business prospects.
But if price is what you pay, Cloudflare’s bears will be quick to point out that shares trade at a hefty 50 times next year’s projected sales.
Also, with NET stock requiring investors to look past today’s red ink to locate profits, that is a riskier ask given future earnings are worth less in a rising rate environment. Not to mention the added challenge of current risk-off behavior.
NET Stock at Risk of Further De-Risking
Corrections can happen at any time. From Apple (NASDAQ:AAPL) to Tesla (NASDAQ:TSLA), even the market’s largest and most revered companies will occasionally find their stocks unable to fend off enemy attacks from bears. NET stock isn’t an exception to that rule.
The chances for a larger bearish cycle also grow without the benefit of a healthy investing environment. And today, NET stock is facing that risk as the perception and reality of higher interest rates conspire against richly-priced growth narratives.
To be fair, Cloudflare’s 65% correction since November’s peak is substantial. But it is also true that NET’s bearish cycle isn’t exceptional among growth stocks of NET’s caliber. As InvestorPlace’s Ian Bezek smartly wrote, competitor Fastly (NYSE:FSLY) should serve as a warning of what could still go wrong.
Sure, the circumstances surrounding why FSLY collapsed 85% over the past 18 months are obviously not the same. But it is true that much of what is bearishly taken as fact in Fastly right now has badly-trailed FSLY’s share price.
A Less Risky NET Stock Proposition
Today, there is something of interest for both bulls and bears in NET stock.
With the risk-off trade potentially back in play, NET stock faltering relative to peers Leidos (NYSE:LDOS), Fortinet (NASDAQ:FTNT) and CrowdStrike (NASDAQ:CRWD) and a monthly chart flag pattern capable of sending shares toward $60 and NET’s 76% retracement level — Cloudflare looks increasingly risky as a purchase.
If bullish investors do see more value in owning NET stock today rather than maintaining restraint, to avoid a worse case of buyer’s remorse and even enjoy the possibility of profiting from a lower share price, I’d recommend an actively-managed collar.
Cloudflare shares still need to clear the monthly flag and $132.50 area on the price chart before NET stock might begin a larger bullish campaign in the right side of a corrective base. One slightly unorthodox but favored combination is for bulls to begin their investment campaign in NET with the June $125/$145 collar.
On the date of publication, Chris Tyler does not hold (either directly or indirectly) any securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.