- Cloudflare is posting strong revenue growth, but analysts remain cautious
- Demand for the company’s products and services will only increase
- NET stock will continue to justify its premium valuation if it continues to meet its revenue targets
Usually, overdelivering delights stock analysts, bnut that doesn’t appear to be the case with Cloudflare (NYSE:NET) stock.
The company posted full-year revenue of $656.4 million which was 52% higher than the prior year. The quarterly revenue of $193.6 million was 54% higher than the year-over-year (YOY) quarter.
The company had similar lofty forecasts for both the current quarter and the full-year outlook for 2022, but analysts have not seemed to be that impressed. Yes, the company has a 27.6% upside. However, that would still leave the stock 31% below its 52-week high.
Louis Navellier chalked much of the investors’ sentiment to overall caution with tech stocks. However, Cloudflare has managed to deliver extraordinary growth at least in the last quarter. There are some stocks that are proving that premium stocks deserve premium valuations.
The reason seems to be like a kind of reverse limbo. The higher the company’s revenue goes; the higher the analysts forecast it to go.
On the one hand, it means the analysts have confidence in the company’s outlook. On the other, it means that Cloudflare must not only beat expectations, but it must also beat them convincingly. If it doesn’t, analysts will use that miss to drive down the NET stock price.
Extraordinary Growth Continues
I last wrote about Cloudflare as 2021 was winding down. At that time, the overriding hope was that 2022 would be a “quieter” year. Our hopes were that the omicron variant of Covid-19 would wind down as expected and the economy would continue to reopen.
It was against that backdrop that I expressed a little concern about NET stock. Specifically, I was concerned that the company wouldn’t be successful in meeting its goal of “extraordinary growth.”
The reason for my concern came from Cloudflare’s CEO Matthew Prince who was using expectations of extraordinary growth to appeal to shareholders.
He reminded them that the company would be funneling a healthy amount of its revenue into research and development. This in turn, meant the company was not likely to be profitable for several years.
Of course, we now know that 2022 has no intention of being a quieter year, and one of the main storylines has a direct effect on the short- and medium-term fortunes of Cloudflare and NET stock. The Russian invasion of Ukraine is highlighting America’s need for stringent cybersecurity measures.
This isn’t surprising. Damage from cybercrime has been growing for several years.
In late 2020, Cybersecurity Ventures forecast that the number would grow from $6 trillion in 2021 to $10.5 trillion by 2025. Keep in mind, that was before the Colonial Pipeline attack much less the Russian invasion of Ukraine.
One of the most common cybersecurity attacks is a distributed denial-of-service (DDoS) attack.
This type of attack attempts to overwhelm a specific server, network or service by flooding it with traffic. To combat this, many companies are embracing zero-trust security.
Grand View Research says that this sector will grow at a CAGR of 15.2%. This will value the market at $59.43 billion by 2028.
Cloudflare offers a suite of products that make it easy to sell to potential clients. It also has been helping them increase the amount of revenue the company is generating from its existing clients.
What to Do With NET Stock?
I suspect that analysts will begin to look at Cloudflare on its own merits and not simply as “another” tech stock at some point. When they do, NET stock is likely to go significantly higher.
My feeling about NET stock hasn’t changed in the last three months. I believe that Cloudflare is a buy IF you believe that the company can continue to meet revenue expectations.
As Mark Hake wrote recently, Cloudflare may have some appeal to growth investors; but it won’t be appealing to value investors.
That’s a good way of approaching it.
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 InvestorPlace.com Publishing Guidelines.