NET Stock: Cloudflare Stock May Have Approximate 2022
Cloudflare (NYSE:REPORT) was one of the biggest winners of the year. The leading IT vendor has seen a huge surge in demand amid an explosion in demand for the company’s products. NET stock is up around 90% year-to-date.
However, the enthusiasm has waned considerably over the past month. NET stock had fallen from $ 60 to $ 220 in the past year, but has now fallen back below the $ 150 level.
This isn’t bad news for Cloudflare. In fact, the company’s latest earnings report was generally bullish, with the company beating both revenue and profit estimates. The orientation was also quite strong. On top of that, Cloudflare recently announced that it will acquire Zaraz, a company that helps accelerate IT without sacrificing user privacy.
So if Cloudflare continues to grow and record good profits, why is NET stock going down now? Simply put, it’s not the business that’s the problem, but the valuation. Cloudflare has climbed too, too fast, and now sees the other side of the peak.
Fastly: we have already seen this movie
Cloudflare’s meteoric rise is not without precedent. Step back in time just 12 months ago, and Cloudflare wasn’t the most prominent high-tech stock. On the contrary, this honor went to Quickly (NYSE:FSLY).
Quickly completed its initial public offering (IPO) in early 2019 and the shares traded without moderation around $ 25 for the following year. Once the pandemic began, however, demand for bandwidth skyrocketed. As Fastly bills by use, its revenue suddenly got stratospheric as everyone started using the net for video conferencing, telemedicine, distance education, and more.
Momentum traders, however, got carried away, pushing the Fastly stock all the way up to $ 125 at one point. Fastly’s business outlook had improved, but it was not about to quintuple. Once the pandemic tailwind died down, Fastly’s stock price collapsed. Stocks are down more than two-thirds from their recent high. With the company remaining unprofitable and its growth trajectory having slowed considerably as the economy reopens, Fastly is on a slow return to recovery.
The net stock will follow the same path
Fastly was trading around 12 times its earnings after its IPO. In the summer and fall of 2020, the stock suddenly jumped from 12 times revenue to 50. It stayed in the 30 range until early 2021, when revenue growth failed. did not meet the enthusiastic expectations of traders. FSLY’s stock again returned to 12 times revenue. It is as if the pandemic wave never happened.
Cloudflare, on the other hand, started trading around 15 times revenue after its own IPO in 2019. The stock has gradually grown to around 30 times revenue at the start of the pandemic. It climbed to 60 at the start of this year and leveled off there for a while. In October, shockingly, NET stock exceeded sales 100 times. This is ridiculously excessive.
With the recent pullback, NET stock has returned to 73x revenue. Unfortunately, that means the stock still has something like 70% downside ahead. Almost all of the major growth stocks have fallen to less than 20 times earnings in recent months. The market is simply no longer willing to give ratings a la carte to most growing businesses, especially those that are not even profitable yet.
Falling Cloudflare from 100x sales to 20x or less will be a long and painful lesson for traders who have ignored the valuation. Do not believe me ? Just ask people who owned Fastly stocks at 50 times the sales last year how it worked for them.
NET stock verdict
There is an old adage that a good business isn’t necessarily a good investment. Price is a crucial element in the success of an investment. And the all-time high shows that buying stocks at 75 times income usually doesn’t turn out well.
Even in the unlikely event that one company is in fact next Amazon (NASDAQ:AMZN), you are usually not going to buy well at such an inflated price / sales ratio. Remember, AMZN stock itself fell 90% in the wake of the dot-com crash. Set aside your opinions on Cloudflare’s business fundamentals for now. With the NET share price this high, the odds are against investors here. Give yourself another look in 2022 once stocks hit a more reasonable level.
As of the publication date, Ian Bezek does not have (directly or indirectly) any position in any of the stocks mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com Publication guidelines.
Ian Bezek has written over 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a junior analyst for Kerrisdale Capital, a leading New York-based hedge fund. You can reach him on Twitter at @irbezek.