NET stock could rebound from here, but I wouldn’t count on it

Cloudflare (NYSE:REPORT) the stock was one of the growth scores hammered down by the recent market sell off.

Source: Various photographs / Shutterstock.com

Going from around $ 200 per share to around $ 140 per share, the NET stock appears to have bottomed out.

Where does he have it? News of the Omicron variant of Covid-19 may have sparked this recent market volatility, but it was the hawkish remarks by the Federal Reserve that backed it up.

As inflation remains at decades-long highs, the central bank is getting closer to tackling it. A radical change from his position at the start of the year, when he described inflation as “transitory”.

If the Fed finally takes action to tackle inflation, accelerate its program of phased spending cuts, as well as possible increases in interest rates, rich growth stocks like this could end up give back more of their earnings.

Again, maybe not. The Fed could end up acting in a way that helps moderate price increases, while preventing growth stocks from collapsing due to multiple squeeze.

Still, that doesn’t mean you should buy. Comparing its questionable full rebound outlook, against the downside risk if less favorable conditions for growth stocks emerge, may be the best decision.

NET stock: no problem with its underlying activity

Although its shares have fallen over the past month, things continue to buzz for Cloudflare’s underlying business. As a provider of various network services including content delivery, online security and web infrastructure, demand remains strong. This is clear from the strong results of the company’s latest earnings report.

Released on Nov. 4 for the third quarter ending Sept. 30, it topped analysts’ earnings estimates – $ 172.35 million, compared to the consensus’s $ 165.7 million. It also broke normalized earnings – breakeven, compared to projections of a loss of 4 cents per share. Year-over-year sales growth was 51%. Its growth with large customers is even higher, at 71%.

This, plus its increase in the forecast for the whole of 2021—$ 647 million – $ 648 million, against the $ 629 million – $ 633 million last quarter projection – was well received by investors.

Shortly before the aforementioned post-Thanksgiving sell-off, this news helped propel stocks above $ 200.

However, while it is possible for stocks to rebound above $ 200 per share, it is questionable that this will happen. Not because of something wrong with the business, but rather because of very possible changes in the market environment.

Vulnerable to other declines

As the market appears to calm down, you can assume that a NET rebound in stocks could be imminent. After all, its underlying business remains in high growth mode. However, there is a reason the stock may not rebound and possibly work its way to an even lower price, and that would be the valuation.

Trading for roughly 74.7 times projected sales for 2021 and 54.5 times projected sales for 2022, it’s hard to argue that Cloudflare’s strong growth is not reflected in its valuation.

Of course, that alone doesn’t guarantee other lower moves. A decline in its forward valuation will likely depend on actions by the Federal Reserve to fight inflation.

A phased approach can prevent a market correction, limiting further declines for Cloudflare. If the Fed takes quicker action, however, a steeper drop may occur.

Trading at such a high price with similar cloud service names like Akamai Technologies (NASDAQ:AKAM) and Quickly (NYSE:FSLY), the NET stock could take a double-digit haircut while trading at a more reasonable valuation. Assuming, of course, that it continues to grow at an above average clip.

As it intensifies, investors expect a slight deceleration. But what if its sales growth ends up slowing faster / sooner than expected? It could also put downward pressure on stocks.

The result on Cloudflare

The next direction of Cloudflare stock is primarily dependent on factors beyond its control. That is, the actions of the Fed to fight inflation, as well as the market reaction to these changes. While theoretically higher rates mean lower valuations for growth stocks, it doesn’t necessarily happen that way.

Even if rates go up, they could still be at all-time lows. If interest rates stay below the rate of inflation, stocks will remain the only possible game in terms of securing positive real returns.

This may cause the market to ignore the concerns again. In turn, either by increasing the actions, or at the very least by keeping them stable.

However, given its high premium to its peers and the risk that its growth will start to slow, even if the Fed’s future actions do not cause a market correction, NET stock could still struggle to rebound. . With that, let it go and look elsewhere for buying opportunities.

At the date of publication, Thomas Niel did not hold (directly or indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to the publication guidelines of InvestorPlace.com.

Thomas Niel, collaborator of InvestorPlace.com, has been writing unique stock analysis for web publications since 2016.

Ann J. Cox