1 Cybersecurity Stock to Hold for the Next 10 Years

In today’s world, cybersecurity is one of the top concerns for businesses of all sizes. A successful hack can mean anything from prolonged downtime and loss of sales to the disclosure of sensitive customer information. As such, the cybersecurity market is increasingly drawing the attention of long-term growth investors.

 

One of the most prominent publicly traded companies in this space is Cloudflare (NYSE:NET). While the cloud computing and cybersecurity industries are filled with high-growth companies, Cloudflare is relatively unique in that it seems to have a robust moat.

 

Roughly 80 percent of all websites use Cloudflare. With nearly the entire internet utilizing Cloudflare’s services, the company seems unlikely to lose its footing in the coming years.

 

Cloudflare has also been quite successful in landing large customers, tying it directly to some of the biggest websites on the internet. Among these are household names such as Medium and Discord.

 

Approximately 61 percent of Cloudflare’s revenue is generated by customers that contribute $100,000 or more in annual sales. This lucrative business of serving large, stable online businesses may offer Cloudflare some protection from volatility in digital services.

 

A final reason to like Cloudflare over the long-term is the fact that denial-of-service (DDoS) attacks are becoming increasingly common. This type of attack is one of the primary cybersecurity threats Cloudflare protects its users against.

 

In 2022 alone, the number of DDoS attacks rose by more than 200 percent year-over-year. As long as DDoS attacks and related cybersecurity threats are on the rise, businesses and websites will have little choice but to continue investing in Cloudflare’s security products.

 

Even as NET share price plummeted, the company continued to generate enormous revenue growth. In Q3, the company reported $253.9 million in revenue, up 47 percent from the previous year. This continued a trend of rapid growth at the company that has become one of the key drivers of investor interest in Cloudflare stock.

 

Despite its market dominance and enormous revenue growth, Cloudflare has struggled to produce positive earnings. Q3’s loss totaled $0.11 per share, slightly better than the loss of $0.13 per share that analysts had projected.

 

It’s worth noting, however, that Cloudflare continues to invest heavily into research and development. In the 12 month perid that ended on September 30th, for instance, Cloudflare spent $280 million on R&D. Provided this spending results in continued revenue growth, the wait for positive earnings and cash flows could be worthwhile for investors.

 

Cloudflare’s revenue growth is expected to continue at a compounded rate of 39 percent through 2024, resulting in annual revenues of over $1.75 billion within two years.

 

While the growth rate will very likely taper off afterward, it seems reasonable to assume that the company can continue generating outsized revenue growth for several more years. If that growth coincides with a move to positive earnings, investors could see excellent returns on a multiyear time horizon.

 

Although Cloudflare seems to have ample long-term potential, analysts are fairly bearish on the stock’s short-term prospects. Over the next 12 months, the consensus analysts’ target price for Cloudflare is $57. The consensus rating for Cloudflare is a Hold, though 13 of the 28 analysts covering the stock do rate it as a Buy.

 

Cloudflare’s valuation has also fallen off markedly in the last two years. After peaking at over $200 per share late in 2021, the stock has declined peristently. This has made Cloudflare significantly more attractive, as it appeared highly overvalued at its previous highs.

 

While the stock still trades at a considerable premium, Cloudflare’s future growth prospects could justify the price for long-term investors.

 

Cloudflare’s large single risk factor is likely its heavy debt exposure. At over 2.4 times equity, the company is well beyond what is normally considered a safe debt threshold. This could be an especially serious disadvantage as interest rates rise. If Cloudflare is forced to continue borrowing to fund its operations, the company could find itself buried by interest payments.

 

Although it doesn’t seem likely at the moment, loss of market share to competitors could be a long-term risk for Cloudflare.

 

With more and more money being spent on cybersecurity, large competitors like Amazon may eventually use their resources to displace Cloudflare. For the moment, though, Cloudflare’s nearly universal usage provides it with significant insulation from potential competitors.

 

Another hazard for any cybersecurity business is the potential for high-profile breaches that result in reputational damage. In such an event, shareholders could see rapid spikes in volatility. This risk isn’t unique to Cloudflare, but it’s worth keeping in mind when buying the stock.

 

Barring unexpected disruptions, Cloudflare should maintain its dominant position within the cybersecurity industry. If the company’s revenues continue to grow as expected and earnings move into positive territory, investors could see the stock outperform the market over the next 10 years.

 

Cloudflare’s dominance also makes it likely that the company will continue to grow alongside the online sales and communications markets. With the internet still expanding rapidly, Cloudflare could ride the wave of online sales growth for many years to come.

 

It’s important to understand, however, that Cloudflare is likely best as a long-term investment. Due to slow projected earnings growth, the stock may not see much or even any upward movement in the next year. With another 5-10 years of growth under its belt, Cloudflare could become quite valuable. Investors who are willing to be patient may want to consider adding Cloudflare to their portfolios as a long-term play on the growth of the cybersecurity market.

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