NET stock still has exceptional growth ahead if you are patient enough

When Cloudflare (NYSE:REPORT) posted strong growth in the third quarter and released its outlook for the fourth quarter, NET stock struggled to break above the $ 205 to $ 220 level.

Source: Various photographs / Shutterstock.com

The fall of the Nasdaq in November put the brakes on CloudFlare.

Now that negative market sentiment potentially accelerates, tech stocks with unfavorable valuations will fall. This gives investors who missed out on Cloudflare’s recent rise to power the opportunity to start a long-term position.

Investors cannot time the end of the correction in tech stocks. Therefore, as markets shy away from Cloudflare on valuations, patient investors should revisit its quarterly results.

CloudFlare reported revenue growth of 51% to $ 172.3 million. It added approximately 170 large customers during the period. Today it has 1,260 major clients.

Cloudflare recorded a net loss of $ 107.3 million, although it noted non-GAAP net income at breakeven.

Speculators are ready to buy companies that have seen zero profits in good times. When panic and cautiousness dominate the markets, lack of income is a concern.

A closer look at NET stock

While a company like Palantir Technologies (NYSE:PLTR) may report small contract wins, measured by revenue, Cloudflare’s potential increases after large companies win.

Directionally, the company’s cloud solutions attract larger customers over time.

Cloudflare has launched a number of products and has good attachment rates with existing customers. This means that customers want to buy more Cloudflare solutions.

New customers discover the business at higher rates. The software company has put together a sales team that builds relationships with larger companies.

Last year, containment linked to Covid-19 forced companies to rethink their IT needs. Businesses embraced online solutions as closures continued. Now that people are physically returning to work, businesses continue to demand cloud solutions. For example, they need databases, cloud providers, and Cloudflare’s R2 solution.

Co-founder and CEO Matthew Prince said that the company thinks R2 is very disruptive in the market. This will allow Cloudflare to not only capture a greater portion of the Item Store spend, minus exit fees.

The CEO believes his competitors are charging too much markup for data charges. He wants to offer the same solution at a fraction of the cost. By helping customers save money, Cloudflare’s market share will increase. It will capture a greater percentage of its addressable market in a shorter time frame.

Investors should take advantage of weakness in Cloudflare stocks to take a long position. Wall Street analysts offer a mixed opinion.

Six analysts rate the stock as a buy and nine rate NET stocks as a wait (by Tipranks). The target price ranges from $ 117 to $ 250.

Risks and fair value

Cloudflare and software stocks are generally at risk of a valuation correction. Investors can mitigate this risk by waiting for the stock price to continue to decline.

This year, investors have lost money by holding Chinese internet stocks or cryptocurrency stocks if they buy to the max. They can sell NET shares for capital gains before the end of this year.

A slowdown in the manufacturing sector could hurt demand for Cloudflare’s software.

For example, its Magic Transit is a winning product. Manufacturing and pharmaceutical companies need it to speed up web traffic and to protect against DDoS attacks (distributed denial of service hacking attack). Cloudflare can circumvent this risk by encouraging customers to continue to use Magic Transit and its other products.

Cloudflare is still trading at an unfavorable valuation. The fair value of the stock can be as high as $ 145.79, assuming income grows 50% per year through fiscal 2025. It is trading closer to $ 140 today.

Metric Vary Conclusion
Discount rate 7.0% – 6.0% 6.70%
Multiple terminal EBITDA 67.5x – 69.5x 68.5x
Just value $ 136.58 – $ 145.79 $ 140.07

Model courtesy of finbox

The discounted EBITDA cash flow output model shown above uses an EBITDA output multiple to calculate the terminal value after five years.

The model established a generous multiple of terminal EBITDA of 68.5 times. In addition, the calculation assumes that interest rates will remain low.

The Federal Reserve has not indicated that it will raise interest rates immediately. This can give Cloudflare a few quarters to show accelerated revenue growth.

Your takeaway meals

Software technology stocks often trade at higher price / earnings ratios than the market average. Investors could bet on the company’s posting of good results in February 2022. With three months to go, the stock could drop enough to prompt investors to take a position in the fast-growing company.

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.

Chris Lau is a contributing author for InvestorPlace.com and many other financial sites. Chris has over 20 years of experience investing in the stock market and leads the Do-It-Yourself Value Market on Seeking Alpha. He shares his stock picks so readers get original information that helps improve returns on investment.

Ann J. Cox