NET Stock: Buy Cloudflare as a Great Panic Attack Approaches

Last week, Cloudy (NYSE:REPORT) released its fourth quarter results and announced an acquisition. Prior to the report, NET shares were trading above $120. This allowed Cloudflare to participate in a “Sell on New” event despite performing well.

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Among content delivery networks, Cloudflare is a contender. It is well placed to take market share from Amazon.com (NASDAQ:AMZN) Amazon Web Services (AWS) and Microsoft (NASDAQ:MSFT) Azure blue.

This would justify NET stock’s astonishing price-to-sales ratio of 62 times.

NET stock pulls back

Cloudflare’s stock price will depend on market sentiment for the Nasdaq. Last Friday, investors sold stocks when the stock encountered resistance at the 50- and 200-day simple moving averages.

Investors cannot predict when the market panic will end. January 2022 inflation is 7.5% year-on-year. It’s at a rate too high for the government to ignore. Macro headwinds will hurt software stock valuations next week.

The underperformance of NET stocks offers growth investors another entry point. The company delivered exceptionally strong revenue growth, net dollar retention and record operating cash flow.

Strong fourth quarter results

Cloudflare reported revenue of $193.6 million, up 54% year-over-year. For 2021, it reported revenue of $656.4 million, up 52% ​​year-over-year. Net dollar retention was 125%, driven by strong demand from large enterprise customers. The $40.6 million cash flow in the fourth quarter is just the start. In the short term, the company will let free cash flow fall into the negative zone for the next two quarters. It must invest in its network. Cloudflare is also redesigning its physical offices for a post-COVID world.

In the second half of the year, the company will return to positive free cash flow. Prudent investors will mistakenly assume that cash burn adds risk to investing in this tech company. The reverse is true: Cloudflare needs to take advantage of its economies of scale and network effects. This will increase the growth rate of his business. Moreover, it will innovate to achieve higher yields.

Opportunity

Cloudflare needs to increase the operating margins of its existing network. This will increase network traffic with greater efficiency. This will reduce the cost of operating a private connection on the public Internet. He will add another provider to his network. Then it will optimize performance and reliability.

The strong backbone gives Cloudflare customers the confidence to get the best network. On top of that, they can subscribe to its zero trust offer.

Cyberattacks are the modern equivalent of ransomware. In light of the virtualized workspace, enterprise customers need a zero-trust network. Cloudflare offers an attractive offer because the end user connects to the office network without being exposed to the public internet.

On February 10, Cloudflare announced the acquisition of Vectrix. This adds modern cloud access security broker (CASB) functionality to its zero-trust platform. Cloudflare One can analyze third-party tools such as Google Workspace, AWS, and GitHub. It will detect risky activities such as file sharing and misconfigurations of user permissions to prevent a security breach on client networks.

Risks

Supply chain disruption risks increasing costs and adding uncertainty to Cloudflare’s growth. Fortunately, the company has leveraged its business relationship over the past year. It has an efficient supply. It cuts costs by using its software-defined network.

Related investments

Tech investors can consider CyberArk Software (NASDAQ:CYBR). The cybersecurity company posted a strong subscription booking mix of 71% in the fourth quarter. The CYBR stock has a P/S of 12 times. The stock is relatively undervalued compared to the NET stock.

CrowdStrike Holdings (NASDAQ:CRWD) has a compelling suite of security solutions. It trades at a P/S of 31 times. Stocks are relatively expensive compared to the technology index. Nonetheless, investors should anticipate higher cyberattack frequencies that drive demand for CrowdStrike’s solutions.

Just value

Wall Street analysts have a price target of $275.61 on CRWD shares. This optimistic upward forecast will require revision. Although 21 of 24 analysts rated the stock as a buy, the most recent price target offer was more than three weeks ago. Analysts will have to adjust to the compression of valuation multiples in the coming months.

The Nasdaq’s decline suggests investors are unwilling to buy stocks trading at high P/S multiples. Analysts will have to lower the price target to account for Cloudflare’s higher spending over the next two quarters.

NET stock market score

NET stock score on value and quality.

Stockrover chart

Cloudflare’s low value score of 31/100, as shown above, would encourage investors to wait for a better price. The stock has a good return on invested capital, earning it a 47/100 on its quality score.

Given that Nasdaq volatility is still in its infancy, patient shareholders should wait for panicked investors to hurt Cloudflare’s stock price. When this happens, the stock becomes an attractive long-term holding.

The CDN company is suitable for investors who have a time horizon of 12 to 36 months. The stock will continue to swing wildly, so expect its value to fluctuate in the short term.

As of the date of publication, Chris Lau had (neither directly nor indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com publishing guidelines.

Chris Lau is a contributing author for InvestorPlace.com and many other financial sites. Chris has over 20 years of stock market investing experience and leads the do-it-yourself value investing market on Seeking Alpha. He shares his stock picks so readers get original insights that help improve investment returns.

Ann J. Cox