NET stocks are cheap for growth investors, but expensive for value buyers

Source: various photographs / Shutterstock.com

  • Cloudy (REPORT), the cloud-based security technology company, reported outstanding fourth quarter numbers.
  • This has boosted analysts’ revenue and earnings forecasts for 2022 and recently helped NET stock rebound.
  • If Cloudflare continues to rack up revenue, one would expect the stock to hit its former highs.

Cloudy (NYSE:REPORT) is down 9% year-to-date (YTD) at $114.40. But that’s after NET stock hit a low of $80.07 on January 6 and another recent low of $84.16 on March 14.

Investors can expect NET stock to rise even further based on its valuation.

Teleprinter Company Current price
REPORT Cloudy $114.40

Where are things at Cloudflare

I wrote about this low price on January 7, in my post, “Cloudflare Stock is a bargain at more than half of its highs.” I argued that the stock’s valuation was attractive given its expected 2022 earnings. But that was before 2022 earnings figures were released. At the time, Street’s estimated earnings would be approximately $647-648 million.

On February 10, the actual numbers were $656 million for 2022. That exceeded expectations. NET stock has surged since then.

Moreover, the revenue forecast for 2023 has also increased. As you can see in my previous article, analysts interviewed by Refinitiv (as seen in Yahoo! Finance) predicted revenue of $888.4 million for 2022. But now, those same analysts are now forecasting sales of $931.12 million.

This obviously represents much higher growth in 2022 than even previously expected.

Higher revenue forecasts

For example, at the end of January, analysts were expecting revenue growth of more than 35% in 2022. But now they expect a 41.9% increase in revenue in 2022 compared to 2021.

The point here is that they assume Cloudflare’s cloud-based security products are selling like hot cakes, so to speak. One of the reasons for this is that the company is expanding rapidly overseas. Additionally, they also see customers increasing their spend within the company for more than one product.

For example, CEO Matthew Prince gave the example of a Fortune 500 financial services company that:

“[E]expanded their use of our platform by signing a three-year, $900,000 expansion agreement, bringing their annual contract value to over $1.5 million. They described it as “timeless”. This is an example of our bundling our platform to give them access to a wide range of our features while minimizing supply friction. »

What analysts are saying about NET Stock

RBC Capital analyst Matthew Hedberg said in a report that Cloudflare has seen strong revenue growth, according to Investors Business Daily. It showed “strong business momentum with large customers (over $100,000) growing +71% and now accounting for 54% of revenue versus 46% in 2020.”

IBD said Jefferies analyst Brent Till had a similar view. He said Cloudflare now has “1,416 customers spending over $100,000 (annual contract value).” This provides a huge source of stable revenue growth and potential contract upsell opportunities.

As you can imagine, analyst price targets are now significantly higher than today’s price. For example, the average at TipRanks‘survey of 17 analysts is $150.29, more than 28.5% higher than the current price.

Similarly, the Refinitiv survey (consulted on Yahoo! Finance) from 21 analysts is $158.86, which is 33.5% higher than today’s price.

What Investors Should Do With NET Stock

It is not a valuable title. Its price/sales (P/S) multiple is 41 times for 2022 estimates and around 31 times for 2023 revenue forecasts. This is generally high for the price/earnings (P/E) multiple of a company, even for a growth stock.

But if you’re open to nosebleed valuations and think a five-year outlook is worth investing in, buy stocks NET now. You will have to assume that the stock is cheap over a five-year perspective. And that could mean a lot of volatility until the long run hits.

As a result, for growth investors, the NET stock seems worth investing in, but for value buyers, this stock is too high.

As of the date of publication, Mark Hake did not hold (either directly or indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com publishing guidelines.

Ann J. Cox