NET Stock falls victim to bearish sentiment that should subside soon
With a few exceptions, growth stocks are under extreme pressure. For a while this included Cloudflare (NYSE:REPORT) stock also.
NET stock was hitting all-time highs as recently as mid-November, while the rest of its peers were in the gutter. At this point, most growth stocks were down 40% to 50% or more after a few painful months.
You could argue that the last two picks – Nvidia and Adobe – are large cap or mega-cap stocks exempt from the nickname “growth stocks”.
Either way, the point is that Cloudflare was one of the few stocks to dodge the bear market in growth stocks, but that observation is no longer true. Down 40% from the peak on November 18, and we’ve seen a lot of hot air coming out of that name.
Does that make it a purchase? Well, it’s complicated.
Cloudflare is growing but not cheap
Cloudflare is a cloud-based company that is generating some pretty impressive growth. There has been a lot of debate about Cloudflare vs. Quickly (NYSE:FSLY) given the work the two have done in the edge cloud.
We can discuss the quality of each service, but growth does not lie. While Fastly relies on forecasts of annual revenue growth ranging from 16% to 20%, Cloudflare offers much more impressive estimates.
Consensus expectations are for 50% revenue growth this year, 37% growth in 2022, and 32% growth in 2023.
The growth investor in me says the stock can only stay low for so long with estimates like this. However, the traditional investor in me is holding back a bit when they see the valuation.
The shares are currently trading at 68 times this year’s revenue expectations and 50 times next year’s estimate. Conversely, FSLY stock is trading at a much more reasonable level 13 times this year’s estimates and 11 times 2022 expectations.
To me, this sounds like how the market is betting on Cloudflare to win the edge cloud. They might be right, but the assessment is certainly sobering.
For investors, this is a pain point that they must juggle: growth vs valuation.
During a bull market, valuation doesn’t seem to matter much. Investors will offer higher shares regardless of the cost, as long as the company continues to deliver. In a bear market, the same is not true.
November 4, Cloudflare generated higher and lower earnings and provided an above-consensus outlook for its fourth quarter sales and earnings. It is as if the market has completely forgotten this report, however.
Cloudflare as a company is in a bull market, but NET stock is in a bear market. When that bear market changes, Cloudflare stocks should tear up.
NET shares trading
As the title mentions (and which we just discussed), Cloudflare has a high valuation, but it is mired in a bear market with its peers. Bear markets are tough.
The losses are piling up, weighing not only on the value of our portfolio, but also on our psyche. The non-bearish market across the entire US stock market makes things even more difficult.
the Nasdaq delay it S&P 500, but both are only a stone’s throw from historic peaks. Not only does this create a sense of frustration that growth stocks are lagging far behind the indices, but it also creates another potential risk. However, a general equity market correction is unlikely to bode well for growth stocks that are already suffering.
The optimist in me wants to believe that NET stock underwent a five-wave “ABCDE” correction until the VWAP weekly measurement. It came with a virtual 200-day moving average test.
The realist in me knows that bear markets may persist longer than expected and the sell may not be over yet. Additionally, while NET stock is down significantly, it has fallen less than many of its peers.
My concern is that the market wants to erase the stock’s previous rally in the fourth quarter – the one that took Cloudflare stock from $ 110 to $ 220 in less than two months.
A fallback in this key area would also give us a test of the 50 week moving average. Additionally, this would equate to a 50% drop from peak to trough.
That said, when the bear market is finally ending in NET stocks and growth stocks as a whole, the rally could (and probably will be) violent.
As of the publication date, Bret Kenwell is long in FSLY, TTD and NVDA. The opinions expressed in this article are those of the author, subject to InvestorPlace.com Publication guidelines.