The net stock is not ideal for investors looking to profit soon
It’s the best of times for Cloudy (NASDAQ:REPORT) Inventory. This is the worst time to own Cloudflare stock.
Cloudflare grows like a weed. 2021 revenue exceeded 2020 revenue in three quarters.
When the full year is counted on February 10, growth is expected to reach 43%.
Unfortunately, investors are no longer buying growth. They want gains. Over the past two months, Cloudflare’s stock price has fallen by more than half.
It is trading today at around $93. That still leaves a market cap of $30.4 billion on 2021 revenue of less than $650 million, with a fourth-quarter loss expected. Cloudflare’s stock can never be cheap.
For those who listened to me when the growth was there, those are dark days. Should we fold our hands or wait for the market time to clear?
The Bull case for NET Stock
Everything that was true about Cloudflare in September remains true.
Cloudflare is a leader in IT security, defeating even the biggest Distributed Denial of Service (DDoS) attacks. Cloudflare says these grew 175% in the fourth quarter alone.
Cloudflare is also a content delivery network, caching files near users to provide a “network as a service”.
It has nodes in 250 cities, from which it can spin data quickly, on an ad hoc basis. This makes it a leader in Web3, the decentralized cloud structure I’ve called cloudless cloud,” because Cloudflare doesn’t need to own infrastructure to sell it.
If the NET stock just has a market problem, then bulls like Guardian Capital (and me) are right to push the stock.
Short-term problems, unlike long-term problems, represent a buying opportunity for those who measure gains in years rather than days.
Cloudflare has other, more troubling issues. Some are political.
Although he won in court for refusing to remove customer content on copyright grounds, he is still accused of selling services to “bad actors” on the dark web.
The situation has escalated to the point where the European Union will soon create its own Domain Name System (DNS) so governments can remove suspicious sites from its web.
Cloudflare CEO Matthew Prince lays blame carriers that do not validate network routes, Like Verizon (NYSE:VZ), for growing problems.
Being at the forefront of change, like Web3, also puts Cloudflare’s policies in the crosshairs of criticism. Advocating for customer rights without paying attention to who those customers are could get Cloudflare in trouble.
Prince revels in the attention. When Cloudflare recently announced its first cloud storage product, it called it R2, a joke to Amazon.Com (NASDAQ:AMZN) S3.
The pitch for R2 is that it will eliminate egress fees, which Amazon charges to fetch data from its cloud.
For now, analysts are sticking with Cloudflare. While a Tipranks analyst says to sell, the average price target is almost double its January 20 price.
Don’t put all your money into Cloudflare. I did not do it.
I lost a third of the Cloudflare stock I bought in December. Right now, I’m more inclined to buy more than sell. This would lower my price per share and bring earnings closer.
My timing was bad on this one. I blundered. The macro environment is important, even with growth stocks. I doubt I will break even on my Cloudflare investment until 2023.
If you can’t wait like that on an investment, avoid stocks like Cloudflare. Volatility works both ways at the peak of change. But you want money on that bleeding edge because change keeps accelerating.
As of the date of publication, Dana Blankenhorn held long positions in AMZN and 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 email@example.com, tweet it at @danablakenhorn.