Why NET stock fell sharply
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When the Nasdaq corrected somewhat last month, Cloudy (NYSE:REPORT) fell sharply from the 52-week high. Content delivery network provider NET Stock released quarterly results that failed to impress investors.
Source: various photographs / Shutterstock.com
NET stock may have unfavorable valuations. This is not a sufficient reason to justify the stock’s recent fall. Growing investors looking for good value for an innovative company should consider Cloudflare from here.
Losses weigh on NET stock
In the third quarter, Cloudflare reported revenue of $172.3 million, up 51% year-over-year. He added more big customers. This indicates that companies recognize that its innovative platform will serve more companies. While non-GAAP earnings per share were at breakeven, GAAP EPS was a loss of 34 cents.
Cloudflare expects fourth-quarter revenue to reach up to $185 million. He will win between a one-cent loss or break-even. As markets brace for higher interest rates, Cloudflare’s unsustainable valuations will put pressure on the stock price. Markets value the stock at a price-to-sales ratio of almost 80 times.
Strong outlook for NET stock
Cloudflare has a large and growing addressable market. It has a widely distributed global cloud platform that provides stability and accessibility to its customers. Its product portfolio is extensive. For example, he rolls out new products that he calls the Innovation Lease. This includes Speedweek, which offers customers the fastest security and a zero-trust network.
The company welcomes developer innovation. Its investments in innovation will attract more customers to its platform.
Market sentiment has changed over the past few weeks. Instead of paying a premium for its expected growth, investors want to wait for Cloudflare to achieve accelerated revenue growth first. Investors can watch Palantize (NYSE:PLTR) as a comparable software publisher. Palantir enters into agreements with companies in the healthcare and government sectors. Still, contract sizes start small. Similarly, Cloudflare signs deals with Fortune 500 companies.
CEO Matthew Prince highlighted the company’s deal with a Fortune 500 pharmaceutical company. It expanded its use of the Cloudflare 1 platform. The client signed a $600,000 expansion deal . The contract total is now over $2 million. The customer uses a range of services such as Cloudflare Gateway, a Zero Trust web application gateway.
Other companies will use Cloudflare’s many offerings. Their contract size will also increase. But the market capitalization in the $50 billion range could prove too expensive for growth investors. The technology software sector has not faced a significant valuation correction for a long time.
The stock market must adjust to the Fed’s rate-tightening cycle starting in 2022. Inflation continues to rise in the United States and around the world. Not only will stocks need to correct valuations, but Cloudflare needs to demonstrate that its business will thrive in this tighter environment.
In the software infrastructure sector, investors may consider larger and more proven companies. Microsoft (NASDAQ:MSFT) has a strong Azure cloud platform. Demand for its database and office productivity software isn’t slowing. Oracle (NYSE:ORCL) recently released strong results, proving that when customers move to the cloud, they need Oracle’s solution.
In the digital transformation space, people need Adobe (NASDAQ:ADBE). The PDF reader is the standard application for individuals and businesses. Subscriptions to its creative cloud solution continue to grow.
On Wall Street, analysts are pricing the stock as a “buy,” although more NET stocks are considered a stock to hold. The average price target is $207.50, according to tipranks. The price target range is wide, between $117 and $250.
Cloudflare’s stock market score is generally fair to poor. Ratings will improve once the company shows stronger margins.
Graphic courtesy of Stock Rover
In the chart above, Cloudflare’s valuation rating is low. This is due to its unfavorable price-to-earnings ratio and earnings per share. Conversely, the stock has a decent quality score. Slight margins affect the quality level of the title.
Seasonality of Cloudflare versus the S&P 500 Index
Graphic courtesy of Stock Rover
In the ten-year seasonal chart, Cloudflare typically outperforms the S&P 500 from January through July. As the Stock Rover research report indicates, outperformance is highest in June and October each year.
Competition for secure cloud services could intensify. CEO Prince said the competitive landscape hasn’t changed significantly. The company will go upmarket by strengthening its moats. Also, its high success rates among competitors are improving. Customers need to replace old hardware enclosures. This trend will continue over the next 10 years, supporting Cloudflare’s growth rates.
Your takeaway meals
Cloudflare attracts large enterprises. Income from won contracts will not appear yet. Customers first evaluate the cloud solution. Once they conclude that the product offerings meet their needs, they will purchase more Cloudflare solutions.
Wait for the selling pressure on Cloudflare shares to decrease first. It will eventually find support when the correction ends. After breaking even the following quarter, the company positioned itself to post higher earnings thereafter.
As of the date of publication, Chris Lau had (neither directly nor 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.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.