NET Stock: Long-Term Trends Favor Cloudflare Stock
Cloudy (NYSE:REPORT) stock supports a vitally important technology in today’s Internet. The company is growing rapidly, investing wisely before growth.
But if you’ve recently bought Cloudflare stock, like me, you have an uneasy feeling in the pit of your stomach.
Its price is down almost half from its peak in early November. It opened Feb. 28 at around $110.61/share.
It’s still very expensive, in every way. Revenue for 2021 was $656 million. The market cap is just over $35 billion. It sells for 53 times its turnover.
Is it time to dump it and wait for better days? It depends on your point of view.
Investing vs Trading
If your profit time horizon is short, you should have missed stocks like Cloudflare at the first sign of trouble.
Cloudflare is down for macro reasons, not micro reasons. Technological sinking was followed by inflation, which was followed by war in Europe. All tech stocks are down. the S&P is down 9% since the start of the year.
But Cloudflare’s business is doing well. Last quarter gross margins were 77%. Operating cash flow is positive. But research costs have almost doubled. The company is also moving from security services to “cloudless cloud”, with cloud workloads stored in many locations and not just one.
Cloudflare has become one of the most prominent companies in the internet space. Its infrastructure is ideal for stopping Distributed Denial of Service (DDoS) attacks, where servers are flooded with fake traffic to stop them. Its knowledge of where data is moving also helps it stop ransomware attacks.
By using its own Domain Name System (DNS), it can place large, low-latency data stores close to where they are used. This makes it a competitor for companies like Akamai (NASDAQ:AKAM), whose local storage is built on a dedicated infrastructure.
The pandemic has been great for Cloudflare. The shift to cloud gaming and remote working is great for Cloudflare International tensions are even good for Cloudflare. But the cost of leadership is high. That’s why research costs have doubled over the past year. Cloudflare also launched a paid bug bounty program to get more help in protecting its software.
When to buy
Cloudflare hit what could be a tradable low in late January, falling below $90/share. It was shortly before the announcement of the results. Since then, it has risen almost 20%, although the general market has continued to decline.
This relative strength allowed it to buy Area 1 Security, which is in the business of stopping phishing attacks, for $162 million. The agreement extends Cloudflare offerings to email protection.
That doesn’t mean Cloudflare’s stock is about to rise again. It’s still expensive. The economy could easily take a dive. Shares of tech stocks fell in premarket trading on Feb. 28 as the reality of the Russian-Ukrainian war set in.
I’m posting about a 33% loss on my Cloudflare purchases. I don’t sell.
Analysts I trust remain optimistic. I wouldn’t put a price target of $245/share, like some do, unless world events turn around dramatically.
But when events turn, the NET stock turns quickly. I can’t guarantee you’ll see today’s prices for long. You can treat this as an exchange and try to get cheaper out of fear. But you might not succeed, because the long-term trends are in favor of Cloudflare.
If you are looking at 3-5 years, if you are an investor and want to make time your friend, now is a good time to buy NET stocks. Snack on it, and if it falls again, snack on some more. Then wait for better days.
As of the date of publication, Dana Blankenhorn held a long position in NET. The opinions expressed in this article are those of the author, subject to InvestorPlace.com Publication guidelines.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of The Big Bang of Technology: Yesterday, Today and Tomorrow with Moore’s Law, available on the Amazon Kindle store. Write to him at firstname.lastname@example.org it to @danablakenhornor subscribe to his Sub-stack.