While broad market corrections are inevitable, it is always interesting to see who leads the pack. Recently, Cloudflare, Inc. (NYSE: NET) has been one of the bear leaders in the Technology sector, losing as much as 50% in as little as 2 months.
From a technical standpoint, high-volume sell-offs do not fare well.
Too Much Too Fast
Cloudflare's success is no secret, as the company grew its revenue by mid-double-digits, it also succeeded in boosting its large customers (over US$100k in annualized revenue) list by over 70% Y/Y.
Considering the following market share in the Distributed denial-of-service (DDoS) and bot protection software market, Cloudflare is a leader by a significant margin.
The DDOS protection market is growing at a compound annual growth rate (CAGR) of 17.71% and is expected to reach US$4.25b by 2026.
Yet, at the peak in November, Cloudflare traded at 72x forward sales, an astonishing number that blows out of the water even other high-growth tech stocks like CrowdStrike Holdings (NASDAQ: CRWD).
Volume Advises Caution
If you observe the volume data from 2021, you will notice that all but 1 volume spikes were on the decline. In general, volume confirms the trend, and in this case, it was one of the canaries in the coal mine – showing the lack of conviction in the sustainable uptrend.
Even the latest sell-off had almost 10 million shares changing hands, more than twice the average daily volume. Although technical are out of the scope of our analysis, volume analysis can be a part of the larger picture.
What's the opportunity in Cloudflare?
According to our valuation model, Cloudflare seems to be reasonably priced at around 19% below our intrinsic value, which means if you buy Cloudflare today, you'd be paying a reasonable price for it. And if you believe the company's true value is $121.89, then there's not much of an upside to gain from mispricing. Furthermore, Cloudflare's low beta implies that the stock is less volatile than the broader market.
Can we expect growth from Cloudflare?
Future outlook is an important aspect when you're buying a stock, especially if you are an investor looking for growth in your portfolio. Although value investors would argue that it's the intrinsic value relative to the price that matters the most, a more compelling investment thesis would be high growth potential at a low price. With profit expected to grow by 65% over the next couple of years, the future seems bright for Cloudflare. It looks like higher cash flow is on the cards for the stock, which should feed into a higher share valuation.
What this means for you:
Are you a shareholder? You seldom sell on the top - you either sell on the way up or down. Holding the stock here depends on 3 things: your buying price, investment horizon, and other opportunities to employ your capital at the moment.
However, there are also other essential factors that we haven't considered today, such as the company's financial strength. Have these factors changed since the last time you looked at the stock?
Are you a potential investor? If you've been keeping tabs on NET, now may not be the most advantageous time to buy, given that it is not showing any signs of bottoming. However, the optimistic prospect is encouraging for the company, which means it's worth diving deeper into other factors such as the strength of its balance sheet to take advantage of the next price drop.
So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. In terms of investment risks, we've identified 3 warning signs with Cloudflare, and understanding these should be part of your investment process.
If you are no longer interested in Cloudflare, you can use our free platform to see our list of over 50 other stocks with high growth potential.
What are the risks and opportunities for Cloudflare?
Revenue is forecast to grow 24.61% per year
Earnings are forecast to decline by an average of 0.4% per year for the next 3 years
Shareholders have been diluted in the past year
Volatile share price over the past 3 months
Currently unprofitable and not forecast to become profitable over the next 3 years
Simply Wall St analyst Stjepan Kalinic and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
Stjepan is a writer and an analyst covering equity markets. As a former multi-asset analyst, he prefers to look beyond the surface and uncover ideas that might not be on retail investors' radar. You can find his research all over the internet, including Simply Wall St News, Yahoo Finance, Benzinga, Vincent, and Barron's.