NET Stock Already Reflects Much of Cloudflare’s Rising Growth
November 4, Cloudflare (NYSE:REPORT), the cloud-based software company, released excellent third quarter results, including revenue up 51% year-over-year (YOY). The problem is, NET stock already reflects much of the increase available in the stock.
Additionally, even though analysts have increased their short-term revenue estimates, their forecast for the year now shows lower revenue numbers. So Cloudflare is growing at a rapid pace right now, as many businesses today don’t want the expense of maintaining their own servers and the associated security.
It also means that within a few years competitors will enter the market and start to catch up. Which will ultimately slow Cloudflare’s revenue growth.
As a result, at $ 156.25 on Dec. 7, the NET stock had a market cap of $ 51.4 billion, according to Seeking Alpha. Analysts now forecast revenue of $ 1.18 billion in 2023 and revenue of $ 1.85 billion in 2024. However, this 2024 forecast is down from 2.12 billion. dollars, as I mentioned in my last article on Cloudflare.
Where that leaves the value of Cloudflare stock
This places Cloudflare on a 24 times price / sell (P / S) multiple. But, in fact, it is much higher than that. This is because we have to use the present value for 2024 revenue.
For example, using a 10% discount rate over three years, the 2024 revenue estimate of $ 1.85 billion is actually 75.1% of that number, or $ 1.39 billion.
As a result, the actual forward P / S figure for NET stock is higher at 37 times, instead of just 24 times. This means that it is much more expensive than before.
So Cloudflare’s stock cannot drop from here. But you can be sure that much of the upside is already “in” stock prices for the next three years.
After all, revenue for 2022 will likely only be $ 647 million. The market is already assuming that by 2024 it will triple to $ 1.85 billion over the next three years.
A cheaper and reasonable ratio would be 20 times the sales on a future value basis. That would reduce its market value to $ 37 billion (i.e. 20 x $ 1.85 billion). That’s 28% below the Dec. 7 market value of $ 51.4 billion
It also implies that NET stock is expected to be priced at $ 112.50 based on its Dec. 7 price of $ 156.2. That’s 72% of the price.
Most price targets are too high
Now, when it comes to Cloudflare’s pricing targets, a lot of the street doesn’t agree with me.
Most analysts have a much higher price target for NET stocks. For example, TipRanks reports that 15 analysts wrote to Cloudflare in the past three months. Their average price target is $ 208.08 per share. That’s 33% above today’s share price of $ 156.25.
This price target is also way above my price target of $ 112.50. However, over the past couple of months I have increased my price target from $ 100 to $ 112.50. So, I guess I’m slowly warming up to the stock. However, to my honor, during the same time frame the stock went from $ 182 on Oct 21 to $ 156.25.
What to do with NET stock in the future
The point is, despite posting excellent Q3 earnings, Cloudflare stock fell as it already reflects much of the potential upside. And even if it doesn’t continue to decline, the company may have to “grow” in these high analysts’ earnings and profit estimates.
This means the stock could end up treading water for quite a while as its income and profits catch up to its already high valuation. It is an exception in my opinion that the NET stock could end up falling to $ 112.50.
Assuming this to happen, investors still won’t make a lot of money at today’s prices. Their best bet would be to wait for an opportunity to buy cheaply, closer to my target price of $ 112.50.
As of the publication date, Mark R. Hake does not hold any position (direct or indirect) in any of the titles mentioned in this article. The opinions expressed in this article are those of the author, subject to the publication guidelines of InvestorPlace.com.