Where Will Cloudflare Stock Be in 1 Year?

Content delivery and security network Cloudflare (NYSE:NET) is a large component of the internet’s infrastructure. The stock is up over 85% over the last 12 months on higher-than-expected revenue growth, but where do the shares go from here and can Cloudflare sustain its current valuation?

Strong Moat and Good Revenue Growth

One of the key positives of Cloudflare is its strong moat. About 7.6 million websites use Cloudflare, including more than 32% of the top 10,000 sites worldwide. With this massive user base, Cloudflare enjoys a competitive advantage that is very difficult for competitors to breach.

This upside is augmented by strong recent and historical revenue performance. Since going public in 2019, Cloudflare has delivered higher revenues in each successive quarter. This fact demonstrates the stability of its business, as not even lockdowns a few years ago were able to derail revenue growth.

The top line continued rising at a strong pace in Q4. The company reported $362.5 million in revenue, a 32% improvement over the year-ago period. Operating and free cash flows both climbed to record levels of $85.4 million and $50.7 million, respectively. For the full year, of 2023, revenue advanced by 33% and total revenues reached $1.3 billion.

Where Will Cloudflare Stock Be In 1 Year?

According to 30 analysts, Cloudflare stock can rise to as high as $102.42 per share over the next year, representing a modest increase of 4.6%.

Projections do vary widely with the highest price target of $135 per share implying a climb of over 35% and the lowest target of $52 per share resulting in a loss of almost 50% if realized.

Overall, Cloudflare has a Hold rating among analysts.

Selling activity from institutional investors spiked in Q4, with more than $5 billion in NET shares sold.

Institutional ownership still stands at over 70% of outstanding shares, but it’s clear that Cloudflare has lost at least some of the bullishness it once enjoyed from Wall Street.

Steep Losses and Premium Pricing

Like many fast-growing tech unicorns, Cloudflare has yet to achieve profitability. Despite numerous years of strong revenue growth, the company has consistently lost money. The trailing 12-month net loss for Cloudflare has been $184 million, giving the company a net margin of -14.2% on its $1.3 billion in overall revenues.

Perhaps Cloudflare’s biggest problem, though, is its really high valuation. Trading at over 370x cash flow and 26x sales, the stock is priced to grow rapidly for a very long time.

With earnings still deeply negative and profits seemingly far off, this valuation looks quite risky and could make the stock prone to downward corrections in the future.

Another effect of consistent losses that weighs on Cloudflare’s valuation is its high debt load. At 1.7x equity, Cloudflare carries more debt than is generally considered healthy. The fact that the company is still far from turning a profit raises the possibility that it will have to borrow more in order to continue financing its operations.

Can Cloudflare Outgrow Its Problems?

The real question, then, is whether Cloudflare can improve its margins through growth initiative alone, and thereby justify its valuation and manage its debt load.

Q4’s revenue growth was far above expectations, leading to a significant increase in share prices after the quarterly earnings report was released. Although positive, this effect also deepened the company’s valuation problems.

In the upcoming year, revenue is expected to continue growing at a rate of about 30%. Adjusted earnings, meanwhile, could improve by as much as 80%.

While it doesn’t seem likely that Cloudflare will become profitable this year, strong growth in non-GAAP earnings at least suggests that the company has the potential to report positive earnings on a GAAP basis in the future.

Is The Business Model The Problem?

While a massive number of websites use Cloudflare’s services, only around 168,000 of them pay for the premium version of Cloudflare. As such, the ongoing conversion of free customers to paid plans and the retention of those customers who are already paying are both critical to Cloudflare’s future.

Among Cloudflare’s paid customer base, a little over 2,000 large customers contribute the bulk of the company’s revenues. As such, much of Clouldflare’s business is linked to the ability to retain this comparatively small segment of its total customer base.

Another key risk factor to keep in mind is the potential for cybersecurity breaches. Due to its status as a leading service provider on the web, Cloudflare risks losing customer trust in the event of a high-profile lapse in security. This, in turn, could impact the rate of paying customers signing up for Cloudflare services.

Where Will Cloudflare Go This Year?

Given current trends, it seems likely that the upcoming year for Cloudflare will be marked by a continuation of strong revenue growth.

The company does not, however, seem to be in a position to advance significantly toward GAAP profitability over the next year. As such, the stock’s price action will likely depend on how much appetite investors have to continue buying on the promise of potentially distant future profits.

The current valuation also presents a challenge to significant upward price movement. With high growth already priced in, Cloudflare has little room to miss expectations without seeing its share price drop. As a result, the stock could be prone to high levels of volatility.

Ultimately, it seems likely that Cloudflare could advance modestly over the coming year, but NET shares will likely underperform the broader market.

A range of $100-110 seems reasonable, roughly in line with current analyst estimates. This takes into account both Cloudflare’s likely further growth as well as the downward pressure that could be exerted by an already lofty valuation.

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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.