Cloudflare Is a Long-Term Growth Story Caught in a Short-Term Market

  • Cloudflare (NET) is showing strong year-over-year revenue growth.
  • The market believes that growth is already factored into its price.
  • NET stock presents an opportunity for patient long-term investors.
Exterior view of Cloudflare headquarters. NET stock.

Source: Sundry Photography / Shutterstock

Cloudflare (NYSE:NET) is illustrating the problems inherent with growth stocks in today’s market. The 52-week range for NET stock is $64.84 to $221.64. That puts the stock price (which is around $98 as of this writing) at the lower end of the range. However, it only presents an upside of about 36% from its current level.  

That’s not a very compelling story for short-term traders. However, Cloudflare is growing its portfolio and revenue in the area of cloud storage. And with this sector expected to show significant growth over the next few years, a long position in NET stock may make sense for long-term growth investors.  

NET Cloudflare $98.69

Revenue Continues to Grow 

In the fourth quarter of 2021, Cloudflare posted $193.6 million in revenue. That was 12% better than the prior quarter. And that quarter was 13% higher than the quarter before that. And for all of 2021, Cloudflare’s revenue was 53% higher than the total for the prior year.  

The question some analysts are asking is whether this growth can continue. On that score, things are less certain. Cloudflare reports earnings on May 5, and the whisper number has Cloudflare posting revenue of $205.77 million.

That’s right in line with the company’s own forecast for revenue of $205 million to $206 million. And it would be 6% growth, or half of the percentage growth seen in the prior quarter. However, it would be a 49% year-over-year increase.

Analysts project Cloudflare will post a 42% gain in revenue for the entire year. Taking a wider view, the company’s revenue is supposed to grow by an average of 40.3% over the next five years. On the earnings front, the news is even better. Cloudflare’s earnings per share are forecasted to climb by more than 95% per year for the next five years. 

It’s a Question of Valuation 

Growth investors should not necessarily be scared off from stocks that are overvalued. Many of these companies aren’t profitable. That makes using many of the traditional metrics tricky, and that is true of NET stock.  

There are times when a company can grow into its valuation if it grows its revenue and earnings at an aggressive pace. That’s what investors are banking on with a growth stock like NET stock. 

And there could be some reason for that optimism. The cloud storage market, which is key for Cloudflare, is expected to climb to $222 billion by 2027 from $61.1 billion in 2020.  

However, the impressive growth projections cited above — particularly in the case of revenue — don’t really start to kick in until 2024 and beyond. And as I pointed out in April, the company’s CEO Matthew Prince told analysts the company plans to funnel a sizable chunk of its revenue into research and development. This will delay Cloudflare’s path to profitability.  

The saying that value is what investors are willing to pay applies to Cloudflare. And in the current risk-off environment, particularly when it comes to tech stocks, investors seem to have NET stock in a tight range that doesn’t leave much room on the upside.  

Go Long or Stay Away From NET Stock 

Cloudflare stock got well ahead of its value in 2021. As a result, some investors are sitting on a loss. One of my InvestorPlace colleagues, Dana Blakenhorn, is among them and I appreciate his candor.

No investor always gets it right, but as Blakenhorn points out, if time is on your side, NET stock appears to be a reasonable bet. But if you’re looking at a stock for a speculative trade, there are better options to be found.  

On the date of publication, Chris Markoch 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 Publishing Guidelines. 

Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for InvestorPlace since 2019.

Article printed from InvestorPlace Media,

©2023 InvestorPlace Media, LLC