NET stock must undergo correction after its spectacular run

After an incredible 66% gain during the month of October, did Cloudflare (NYSE:REPORT) stock still have juice in the tank?

Source: Various photographs / Shutterstock.com

It’s been a mind-blowing race for the San Francisco-based cybersecurity company. Cloudflare, which specializes in website security, has seen its share price increase by 128% in the past six months. At its current price of just over $ 190 per share, NET stock is now up 268% over the past 52 weeks.

And despite repeated calls from analysts for the title to be correct, it has continued to challenge skeptics and continues to move forward. While the median price target on the stock is currently $ 130 which would be a 32% drop from current levels, there are still some on Wall Street who believe Cloudflare’s stock has more steam in its engine and could climb to over 200 $ in the coming weeks.

Huge growth opportunities

Cloudflare is one of the newest cybersecurity actions. The company only went public in September 2019. Since going public, NET stock has gained 960%, beating the gains of most other tech companies.

The main reason for this great feedback was Cloudflare’s focus on cloud computing security. The company positions itself as a service provider and strives to enhance the speed, reliability and security of its customers’ websites. The market in which Cloudflare operates is developing rapidly and is positioned for explosive growth in the years to come. The company has planned that its global operations addressable market will reach $ 100 billion by 2024.

It is this huge expanding market that is why Cloudflare’s compound annual growth rate averaged 50% between 2016 and 2020. While the growth trajectory of most companies would stabilize after such a period. , Cloudflare’s growth has accelerated. Its revenue grew 53% year-over-year in its most recent quarter. This accelerated growth rate This is what helped push NET stock up over 65% in October of this year.

The company now has 1,088 large customers worldwide (those who spend more than $ 100,000 with the company) and has a 90% retention rate, which means these customers are renewing their services with Cloudflare.

Reason for caution

The rise in NET stock in October was supported by the company’s announcement of a partnership with Microsoft (NASDAQ:MSFT) and other companies such as Yandex (NASDAQ:YNDX) to make their online search engines faster and deliver faster results. The arrangement with the different Search Engines Give Cloudflare a Boost Value proposition.

The company says it will notify Microsoft Bing and other search engines when content is created, updated or deleted, helping them more effectively align Internet searches. Search engine optimization is a service Cloudflare plans to perfect and market to businesses of all sizes.

While Cloudflare’s growth and share price appreciation have been nothing short of spectacular, investors have reason to be cautious with NET stocks. First, Cloudflare now has a market cap of over $ 56 billion and a price-sale ratio out of 89, making it one of the most expensive stocks not only among cybersecurity companies, but across the stock market as well.

To give an idea of ​​the current overvaluation of Cloudflare stocks, consider its closest competitor, Quickly (NYSE:FSLY), has a price-to-sales ratio of 16. Cloudflare’s valuation is now five times that of Fastly and both companies have basically the same revenue growth.

Additionally, while Cloudflare has made giant strides, the company remains unprofitable. While it is not uncommon for young, fast-growing companies to be unprofitable, especially in technology, investors should beware of red ink. Cloudflare has forecast that it will report a loss of $ 28 million to $ 24 million on revenue of up to $ 633 million this year.

Wait for NET stock

Cloudflare next reports quarterly results on November 4. The company’s shares rallied ahead of its next wins and could sell immediately after its financial statements are made public.

Even though it is not selling now, it is clear that the stock has a very high valuation and is extremely expensive as it is approaching $ 200 a share. Add to that the fact that the company is unprofitable and its whopping 158% YTD, and there’s every reason to believe Cloudflare shares will pull back in the near term.

Investors who missed the current rally should wait for the stock to drop to $ 150 per share or less. Watch for a bottom, then try to catch the next rally higher. At present, the NET stock is not A purchase.

At the date of publication, Joël Baglole held a long position in MSFT. The opinions expressed in this article are those of the author, subject to the publication guidelines of InvestorPlace.com.

Ann J. Cox