The transition to digital technology has transformed business. Tools for instant global communication, secure financial transactions, and automated task completion have dramatically boosted production for nearly every industry, leading to improved profitability in many cases.
Unfortunately, there is a catch. Putting sensitive data online is a must to take advantage of technology’s benefits, but that means taking on significant risk. Cybercrime is rampant, and exposure or theft of data costs companies billions of dollars every year.
Cloudflare, Inc. (NYSE:NET) is focused on stopping cybercrime through an advanced suite of tools that promote cloud security. It has demonstrated its value to clients and taken a leadership position in the cloud security space but there has been an observable weakness in the stock’s performance this year, and a selloff followed its last quarterly financial data release.
Why did Cloudflare stock go down? More importantly, is this the right time to buy Cloudflare stock and what will be the catalyst to the next stage of growth?
Stunning Numbers Rely on Cloudflare
At a high level, Cloudflare is a cloud services provider that offers its clients digital security. It’s no secret that maintaining and managing hardware for an individual network is difficult and costly so Cloudflare reduces the expense and simplifies the process for its clients.
It is a pioneer in enhancing web security and optimizing the performance of business systems. The platform is particularly popular for its content delivery network, primarily because it is one of the few companies that offers CDN for free.
Providing access to the CDN at no charge is critical to Cloudflare’s larger customer acquisition strategy. CDN users help Cloudflare attract developers, employees, and customers, all of whom help the company review potential security and reliability issues at the earliest stage.
Cloudflare also offers Denial of Service protection, web application firewalls (WAFs), and IP range prioritization services.
The success of this technology can be gauged, in part, by the fact that Cloudflare commands approximately 20% of the market and 30% of Fortune 1000 companies. According to one estimate, 79.9% of all websites that use a CDN on reverse proxy rely on Cloudflare.
Cloudflare has an especially large international presence as compared to its peers. The platform is used in more than 320 cities and 120 countries worldwide. International markets represented 48% of its revenue in the first quarter of this year.
Truth be told, there’s a lot of room left to run in the global cloud security market due to a confluence of factors like Artificial intelligence and machine learning usage, the popularity of multi-cloud environments, and an overall trend of rising demand.
According to a report by Markets and Markets, the sector is expected to reach $62.90 billion by 2028, growing at a compound annual growth rate of 9.1%.
What Will Drive Growth at Cloudflare?
International growth is expected to be a strong driver of growth at Cloudflare.
The company had a strong start to the year with first-quarter revenue coming in at $378.60 million, representing an increase of 30% year-over-year. Operations in the United States made up the bulk of this revenue, an increase of 28% from the prior year’s period.
Revenue contribution from large customers increased from 62% for the same period last year to 67%. Investors found it reassuring that the company’s top line and gross profit have consistently grown over the past eight quarters.
Cloudflare’s customer metrics brought more good news. As of the first quarter, the company had about 197,000 paying customers, an increase of 17% year-over-year.
The Cloudflare leadership team expressed excitement over the company’s ongoing strong performance with large customers. Cloudflare ended the first quarter with about 2,900 large customers, up 33%, and a quarterly addition of 122 large customers.
Cloudflare added a record number of net new customers compared to the prior year period, and they included companies of all sizes. It noted a rise in clients across spending categories – more than $100,000, $500,000, and $1 million on an annualized basis. The company’s dollar-based net retention rate underscores its reliability, sitting at a hefty 115%.
Although Cloudflare’s GAAP profitability is not especially impressive, the company’s financials are strong on a non-GAAP basis. Its Q1 non-GAAP net income has more than doubled year-over-year.
Why Did Cloudflare Stock Go Down?
The selloff of Cloudflare stock isn’t a referendum on the company’s financial strength or future prospects. Instead, it appears to be the result of external economic pressure.
In short, global economic uncertainty and the geopolitical environment have made current and potential Cloudflare clients a bit shy about large expenditures. Fortunately, though this might mean a short-term dip in sales, Cloudflare’s long-term outlook remains positive.
For the second quarter, Cloudflare’s projected revenue ranged from $393.5 to $394.5 million, representing an increase of 28% year over year.
That is lower than the growth experienced in the first quarter, but it’s still more than adequate. The projected operating income range is between $35 and $36 million on a non-GAAP basis, as compared to Q1’s operating income of $42.44 million.
Is Cloudflare Stock A Buy?
Cloudflare’s impressive market share and significant retention rate show that the company’s services are in demand now, and that demand is expected to grow for the foreseeable future.
Its remaining performance obligations came in at $1.34 billion for the last quarter, representing an increase of 8% sequentially and 40% year over year. In other words, Cloudflare’s future demand appears well-supported.
The recent selloff of Cloudflare stock aligns with its high valuation. The share price sits at 128.92x forward non-GAAP earnings, so a correction isn’t unusual.
Analysts see upside potential to $91.92 per share, suggesting about 12% upside from present levels.
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