Cloudflare (NET) has seen a significant increase of 53.1% in its stock price over the last six months. This exceptional performance surpasses the Zacks Internet – Software industry, the Zacks Computer and Technology sector, and the S&P 500, which recorded returns of 19.6%, 9.3%, and 12.4%, respectively. Investors are now left contemplating whether to invest more in NET stock or to tread carefully.
Market Performance Breakdown for Cloudflare
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Cloudflare Thrives Through Innovation
The growth of Cloudflare can largely be credited to its innovative approach in the content delivery landscape. The company’s goal of building a better internet has attracted various clients, ranging from small firms to large corporations. With a vast global network and a focus on both performance and security, Cloudflare has solidified its leadership status in the sector.
In its third-quarter 2024 earnings report, Cloudflare announced it acquired 219 high-value customers, each contributing over $100,000 annually. Furthermore, a strong net retention rate reflects customer loyalty, showcasing its ability to offer additional services. Notably, NET serves 35% of Fortune 500 companies, indicating its access to an esteemed clientele.
Additionally, Cloudflare has made significant advancements in integrating artificial intelligence into its products. In 2024, the company launched several AI-based offerings and fostered partnerships with AI giants, such as NVIDIA and Microsoft. These initiatives ensure that NET remains at the forefront of technological breakthroughs, capturing the interest of investors.
Assessing Investment Risks for NET Stock
Amid Cloudflare’s impressive achievements, its current stock valuation raises concern. Despite robust customer growth and product innovation, this success seems to be reflected in the current stock price, offering little margin for error.
Currently, Cloudflare’s stock trades at a forward 12-month price-to-sales (P/S) ratio of 18.63, which is considerably higher than the Zacks Internet – Software industry average of 3.13. This elevated valuation brings potential risks to the sustainability of the stock.
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Slowdown in Revenue Growth
Since its IPO in 2019, Cloudflare has enjoyed notable growth. However, its recent quarterly results hint at a slowdown in revenue growth. Although the growth remains commendable, it’s not as explosive as in past years.
Previously, Cloudflare experienced nearly 50% year-over-year revenue growth until 2022. Nevertheless, this growth rate eased to 33% in 2023, with projections for 2024 and 2025 suggesting a further slowdown to between 25% and 30%.
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Competition Toughens for Cloudflare
The web infrastructure and security market is becoming increasingly competitive, with established companies such as Akamai Technologies, Inc. (AKAM), Fastly, Inc. (FSLY), and Amazon.com, Inc.‘s (AMZN) AWS vying for market dominance. Additionally, new entrants continue to emerge, exacerbating competitive challenges.
Cloudflare has distinguished itself with a holistic platform that integrates performance, security, and reliability. Nonetheless, staying ahead of rivals necessitates continuous innovation alongside substantial investment in research and development. This ongoing need poses risks to Cloudflare’s growth and profitability.
Investors: Consider Your Options
Despite Cloudflare’s impressive surge and notable market presence, the volatility and high valuation may prompt investors to act cautiously. The slowing growth rates, competitive landscapes, and broader economic uncertainties carry potential near-term risks.
Thus, new investors may want to wait for a more appealing entry point, while existing shareholders should hold onto their investments. Currently, Cloudflare has a Zacks Rank #3 (Hold), reflecting modest growth prospects amid an elevated valuation.
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The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.
