Net stock: here’s why NET stock has fallen so sharply

When the Nasdaq corrected somewhat last month, Cloudflare (NYSE:REPORT) fell sharply from the 52 week high. Content delivery network provider NET Stock posted quarterly earnings that failed to impress investors.

Source: Various photographs / Shutterstock.com

NET stocks may have unfavorable valuations. This is not a sufficient reason to justify the recent fall of the title. Growth investors looking for good value for an innovative company should consider Cloudflare from here.

Losses weigh on NET stock

In the third quarter, Cloudflare posted revenues of $ 172.3 million, up 51% year on year. He added more big clients. This indicates that businesses recognize that its innovative platform will serve to serve more businesses. While non-GAAP earnings per share was at breakeven, GAAP EPS was a loss of 34 cents.

Cloudflare forecasts fourth quarter revenue of up to $ 185 million. He will gain between a loss of a cent or the breakeven point. With markets bracing for higher interest rates, Cloudflare’s unsustainable valuations will put pressure on the share price. The markets are pricing the stock at a price / sell ratio of almost 80 times.

Strong outlook for NET stock

Cloudflare has a large and growing addressable market. It has a widely distributed global cloud platform that provides its customers with stability and accessibility. Its product portfolio is extensive. For example, it is rolling out new products that it calls innovation lease. This includes Speedweek, which provides customers with the fastest security and zero trust networking.

The company welcomes innovation from developers. Its investments in innovation will attract more customers to its platform.

Market sentiment has changed over the past few weeks. Instead of paying a premium for its expected growth, investors first want to wait for Cloudflare to generate accelerated revenue growth. Investors can watch Palantir (NYSE:PLTR) as a comparable software company. Palantir is in the process of making deals with companies in the healthcare and government sectors. Yet the size of contracts starts out small. Likewise, Cloudflare signs deals with Fortune 500 companies.

Chairman and CEO Matthew Prince stressed the company dealing with a Fortune 500 pharmaceutical company. It has expanded its use of the Cloudflare 1 platform. The customer signed an expansion contract for $ 600,000. The total contract amount now stands at over $ 2 million. The customer uses a range of services such as Cloudflare Gateway, a zero trust web application gateway.

Other companies will use Cloudflare’s many offerings. The size of their contract will also increase. But market capitalization in the order of $ 50 billion may prove too expensive for growth investors. The technology software sector has not experienced a significant valuation correction for a long time.

The stock market must adjust to the Fed’s rate tightening cycle starting in 2022. Inflation continues to rise in the United States and around the world. Not only will stocks have to correct valuations, but Cloudflare will have to demonstrate that its business will grow in this tighter environment.

Associated investments

In the software infrastructure industry, investors may consider larger, more proven companies. Microsoft (NASDAQ:MSFT) has a strong Azure cloud platform. Demand for its databases and office productivity software is not slowing down. Oracle (NYSE:ORCL) recently reported strong results, proving that when customers move to the cloud, they need Oracle’s solution.

In the space of digital transformation, people need Adobe (NASDAQ:ADBE). The PDF reader is the standard application for consumers and businesses. Subscriptions to his creative cloud solution continue to grow.

Just value

On Wall Street, analysts rate the stock as a “buy,” although more NET stocks are seen as a stock to be held. The average the target price is $ 207.50, according to tipranks. The target price range is wide, between $ 117 and $ 250.

Cloudflare's stock score is generally fair to poor.  Ratings will improve once the company posts stronger margins.

Cloudflare’s stock score is generally fair to poor. Ratings will improve once the company posts stronger margins.

Graphic courtesy of Stock Rover

In the table above, Cloudflare evaluation rating is weak. This is due to its unfavorable price / earnings and earnings per share ratio. Conversely, the action has a decent quality score. Low margins hurt the title’s quality score.

Cloudflare seasonality versus the S&P 500 index

Cloudflare seasonality versus the S&P 500 index

Graphic courtesy of Stock Rover

In the ten-year seasonal chart, Cloudflare typically outperforms the S&P 500 from January through July. As a Stock Rover research report indicates, the outperformance is highest in June and October of each year.

Risks

Competition for secure cloud services could intensify. CEO Prince said the competitive landscape has not changed significantly. The company will upgrade its activity by strengthening its moats. In addition, its high success rates among its competitors are improving. Customers need to replace old hardware enclosures. This trend will continue over the next 10 years, supporting Cloudflare’s growth rates.

Your takeaway meals

Cloudflare attracts larger companies. Income from won contracts will not appear yet. Customers first assess the cloud solution. Once they determine that the product offerings meet their needs, they will purchase more Cloudflare solutions.

Wait for the selling pressure on Cloudflare stocks to ease first. He will eventually find support when the correction is complete. After breaking even in the following quarter, the company positioned itself to post higher earnings thereafter.

As of the publication date, Chris Lau 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.

Ann J. Cox