Sometimes the market loves a company’s results so much that it dramatically reprices the stock. That’s what it did when Cloudflare (NYSE: NET) reported earnings on Feb. 8; the stock jumped up nearly 20% the following trading day.
Clearly, there’s something in this report that made investors reconsider their valuation of Cloudflare. But was it overdone, or is the stock still a buy here?
Cloudflare’s Impressive Core Business
Cloudflare is essentially a cloud-based service that hosts workloads while providing cybersecurity protection. Its extensive data center network, spanning 310 cities globally, ensures enhanced speed and security for the hosted content. More interestingly, Cloudflare’s multiple data center locations make it less susceptible to cyberattacks like DDoS, a distinct advantage over single-location hosting. Moreover, although Cloudflare currently has minimal involvement in artificial intelligence (AI), it anticipates a surge in demand, as indicated by the remarkable uptake of its AI solution, the Workers platform, launched in September 2023. Clearly, Cloudflare’s core business is thriving, underpinning investor optimism.
Aggressive Assumptions Impacting Cloudflare’s Stock
Cloudflare’s Q4 revenue surged 32% year over year to $362.5 million, surpassing the $352.5 million guidance. With a focus on growth, the company is yet to turn a profit, but it’s making strides toward profitability. While the operating loss margin was 12% for the quarter, operating expenses grew slower than revenue, hinting at a potential break-even point. However, the stock is currently at its most expensive, marked by a steep price-to-sales ratio of 27. If Cloudflare maintains its growth trajectory, its hypothetical valuation could still remain high in comparison to other tech stocks. The expectations baked into the stock are lofty, making it a hard bet from a stock perspective. Hence, some investors, including myself, have sold Cloudflare stock, although a cheaper valuation could prompt a re-entry into the stock.
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Keithen Drury has positions in Cloudflare. The Motley Fool has positions in and recommends Cloudflare. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
