NET Stock shows the dangers of buying growth

  • Cloudy (REPORT) growing fast but stock was too expensive
  • Nothing is wrong with the company
  • Cloudless Cloud is still a thing

Source: various photographs / Shutterstock

Cloudy (NYSE:REPORT) represents a fast-growing company in an important niche.

Don’t make the same mistake I did and pay too much for it.

I’m still underwater on the Cloudflare purchases I made in December, despite gaining 37% over the past month. This may still be too expensive for commercial profit. Cloudflare opened on April 14 at around $121/share. This represents a market capitalization of $39.4 billion on unprofitable sales of $656 million in 2021.

What could have possessed me? That revenue represented 52% growth from 2020. Shares were trading at $211 in November. I “bought the dip” and it continued to dive, bottoming out in late January at $82.

Why, you ask then, am I not taking my losses? It’s a good question.

REPORT Cloud Flare, Inc. $114.47

The Bull case on NET Stock

Growth is one of the reasons.

Cloudflare will release its next results on May 5, and analysts expect revenue to hit $202 million for the March quarter. The expected gain of 3 cents/share seems reasonable given the rate of growth. For the year, analysts expect 42% growth and a small profit.

Most important is what Cloudflare does. It operates its own domain name system, which it can use to stop denial of service attacks. In addition to its cloud security feature, it can also create ad-hoc virtual private networks, using clouds and data centers in 100 countries, including mainland China, South America and many difficult locations. access in Africa. Cloudflare says it can give 95% of people around the world latency as low as 50ms. I can’t always get that in my Atlanta home office.

The result is the “cloudless cloud”. Cloudflare places cloud services in remote data centers, making them ubiquitous, and creating new competition for companies like Amazon (NASDAQ:AMZN), Microsoft (NASDAQ:MSFT) and alphabetical (NASDAQ:GOOG, GOOGL)Google Cloud. But it’s complementary, like the little branches that give a tree its full canopy.

The cloudless cloud also allows Cloudflare to accumulate innovation, such as the new Cloudflare API Gateway. This will make it much easier for companies to manage their application programming interfaces (APIs), which are essential for their expansion. Cloudflare claims that APIs account for more than 50% of its web traffic requests. The new system allows enterprises to stop misuse of APIs, secure them, and route requests without adding latency.

The Bear case on NET Stock

The case of the bear is simple. You can overpay for growth.

The NASDAQ is down 14% so far in 2022. That’s halfway between a correction and a bear market. Even the Cloud Czars are down. Analysts talk about discounted cash flow value, but that just means interest rates are going up. When money costs money, investors have a choice. They can take the risk of growth in stocks or the risk-free profit of bonds.

Cloudflare didn’t help itself by doling out $6.7 billion in easily won equity grants to its co-founders. These are intended to maintain control of the founders when they sell their high voting shares. It’s good for long-term corporate democracy.

Then there is Russia. Cloudflare does not leave it. Cloudflare notes that it has no employees in the warzone, just software. But it’s not pretty.

The essential

When tech stocks go down, they go down sharply.

But there is a difference between trading and investing. If you need your money immediately, you cannot suffer a loss. If you have a few years to wait, you can.

I don’t need my Cloudflare investment to pay for my retirement. I’m still working and I have a lot of money. It’s in the growth part of my portfolio.

Growth stocks like Cloudflare are now outdated. This makes it a good time to buy them and a bad time to sell them. I may not be able to break even for months, but within a few years I should be doing well.

As of the date of publication, Dana Blankenhorn held long positions in MSFT, AMZN, GOOGL and NET. The opinions expressed in this article are those of the author, subject to InvestorPlace.com Publication guidelines.

Ann J. Cox