Has cybersecurity stock Cloudflare (NYSE:NET) found its bottom? On January 31, NET stock jumped nearly 15% to $96.40 a share in a single trading session. The bounce higher comes after Cloudflare’s stock fell 64% from a mid-November peak of $221.64 to a Jan. 27 trough of $80.07.
The rebound has many investors wondering if the San Francisco-based company has now bottomed and will continue to march back above $100 a share.
While many market observers caution that more pain could be instore for investors in the months ahead, there are some encouraging signs related to Cloudflare that make the company’s current share price an attractive entry point.
Competitive Advantages
Cloudflare is somewhat unique in the cybersecurity space in that it targets small and medium-sized businesses with simple products and affordable prices that appeal to people who work for themselves or have a small contingent of employees and computers to protect from cyber attacks, viruses, etc.
At the end of last year’s third quarter, Cloudflare reported that it had 132,000 customers worldwide, only 1,300 (about 1%) of which are classified as “large customers.” Globally, Cloudflare says it now has operations in more than 250 cities.
Cloudflare remains in hyper growth mode. Its revenue through three quarters in 2021 totaled $463 million, a 52% year-over-year increase. For all of last year, Cloudflare has forecast revenue of $648 million, which would amount to 50% year-over-year growth.
While the revenue growth is impressive, Cloudflare is not yet profitable and reported a loss of $183 million through nine months of 2021, 115% greater than the loss of $85 million recorded during the same nine months of 2020. The lack of profitability, coupled with its high valuation, are the main reasons NET stock has been hard hit the last two months.
High Valuation
While it has come down a lot, NET stock still trades at a staggering price-to-sales (P/S) ratio of 41.89, which is way higher than the median of about 3.8 among its peers. To be sure, Cloudflare is a lot cheaper to buy today than it was around Thanksgiving last year when it was worth double than it is today.
The bottom line is that Cloudflare stock isn’t cheap. The relatively high valuation of NET stock, combined with the company’s lack of profits and the fact that its share price had run up over 1,000% from September 2019 (when it went public) to November 2021 when it hit its all-time high above $220 a share are the reasons why Cloudflare’s stock has pulled back so much in recent months. The company has not been clear about when it will become profitable and continues to focus on global growth.
Wait To See Where NET Stock Heads Next
At its current price, Cloudflare stock looks attractive. Being able to buy shares of the fast moving cybersecurity company for around $100 is very enticing. And the big bounce in the stock recently is encouraging. However, given the market volatility seen in January, particularly among richly valued, unprofitable tech stocks, it is hard to know where exactly Cloudflare’s stock goes from here.
Cloudflare’s stock could recover quickly or it could suffer another setback and fall even further along with other tech stocks. With so much uncertainty swirling through markets right now, investors would be smart to wait before buying Cloudflare shares. Hold on until a real recovery takes hold before buying into a position. For the time being, NET stock is not a buy.
On the date of publication, Joel Baglole 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.
Joel Baglole has been a business journalist for 20 years. He spent five years as a staff reporter at The Wall Street Journal, and has also written for The Washington Post and Toronto Star newspapers, as well as financial websites such as The Motley Fool and Investopedia.
