1 Cybersecurity Stock Still Growing Rapidly

Cloudflare (NYSE:NET), which specializes in internet security and performance, has seen its shares fall year-to-date following poorer than expected revenue forecasts. So far, shares are down 3% over the last twelve months and 15% for the year.

During a recent conversation about Cloudflare’s financial outcomes, management mentioned “uncertain” five or more times and pointed out that changes in world politics are affecting how customers make their purchases. CEO Matthew Prince has expressed numerous concerns given the current environment, and the uncertainty only seems to be growing.

So, with financial woes looming above, can Cloudflare still keep growing at a rapid pace?

Surfing Through Cloudflare’s Quarterly Performance

Cloudflare surpassed the earnings estimates for the fiscal 2024 first quarter. It reported earnings per share of $0.16, which was higher than the expected $0.13. Additionally, revenue reached $378.60 million, slightly above the predicted $373.42 million.

Non-GAAP gross profit came in at $301.1 million, which correlated to a 79.5% gross margin. It compared well with last year’s first quarter of $225.9 million or a 77.8% margin.

Income from operations on a non-GAAP basis was $42.4 million, or 11.2% of the revenue, in contrast to the $19.4 million or 6.7% of revenue during the first quarter of 2023. Net income stood at $58.2 million against the first quarter’s figure of $27.2 million in 2023.

Additionally, the cash flow from operational activities reached $73.6 million, which contrasted with $36.4 million for the initial quarter of 2023.

Free cash flow stood at $35.6 million, representing 9% of revenue against the first quarter’s amount of $13.9 million or 5% of total revenue.

Forecasting Cloudflare’s Future

Management anticipates that in fiscal 2024’s second quarter, total revenue will range from $393.5 million to $394.5 million and non-GAAP income from operations is forecast to be between $35 million and $36 million while non-GAAP net income per share of $0.14 is expected.

For FY 2024, management estimates that total revenues will be between $1.6 billion and $1.65 billion. The company anticipates the non-GAAP income from operations to range from $160 million to $164 million and expects net income per share of $0.60 to $0.61.

Those figures would result in revenues coming in at the high end of analysts range but the pace of growth shows a slowdown. Specifically, it translates to an increase in sales of roughly 27% for 2024, which is significantly less than its yearly growth rate of 41% since 2021.

So, how fast is Cloudflare growing? In 2021, Cloudflare revenues grew by 52.3%, and again by 48.6% in 2022 and in 2023 by 33.0% highlighting how the pace of growth has been slowing.

Cloudflare Landing Major Contracts

Cloudflare is clearly establishing a brand moat with ever more companies selecting it as a preferred solution, as evident by its new three-year agreement with the National Cyber Security Centre.

Over 1,400 organizations from the U.K. alone use Cloudflare’s safety service for Domain Names to protect themselves from malware and online dangers. To grow its presence beyond the private sector and expand into government in the UK, Cloudflare also partnered with Accenture.

The more Cloudflare penetrates top technology and finance companies, the more evident it is that the solution is trusted broadly. And for shareholders what makes new deals even more intriguing is that the odds of an enterprise sticking with Cloudflare is high. That’s apparent from its net retention rate hitting 115% at last count.

One reason the figure is so high is that Cloudflare features numerous offerings and bring many security tools together, whether CASB, DLP, browser isolation, Magic WAN, and Magic Firewall.

The combined platform makes security simpler for many companies, making things work faster and with fewer delays. Also, Cloudflare is helping big government-backed financial services in the Fortune 100 to defend against attacks better and run more smoothly, highlighting just how dependable it is.

This pattern of securing deals with major enterprises in various industries further cements the view that Cloudflare has high potential to keep growing.

Will Cloudflare Stock Recover?

With 17% more paying customers versus last year, and many companies are now spending over $100,000 every year for its services, Cloudflare continues to elbow its way to the top of the cybersecurity market.

Although the macroeconomic concerns paint a gloomier picture for future growth, Mark Anderson, who is the President of Revenue, seems confident that Cloudflare will become a key supplier for big companies like those in the Fortune 500 list. This bold assertion reflects well on the company’s ability to strengthen its market share.

Analysts are broadly in agreement and predict that Cloudflare will see strong growth in the fiscal year that ends December 2024. They expect revenue to leap by 27.5% and earnings per share to go up by 26.90% to $1.65 billion and $0.62, respectively. 

Moreover, Cloudflare has consistently exceeded expectations for revenue and earnings per share in the last four quarters, highlighting its capacity to deliver better-than-expected outcomes.

Among analysts, 15 out of 26 recommend holding Cloudflare shares while the consensus price target is $89.98 per share, suggesting 30.3% upside potential.

Further reasons to be bullish include the fact that 16 analysts revised their earnings upwards for the upcoming period and net income is forecast to rise this year.

Viewing the share price through a technical lens, Cloudflare is technically oversold at this time with its RSI sitting below 30, so on both fundamentally and technically the company appears attractive at this time.

---

The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.