While shareholders of Cloudflare (NYSE:NET) are in the black over 3 years, those who bought a week ago aren't so fortunate

It might seem bad, but the worst that can happen when you buy a stock (without leverage) is that its share price goes to zero. But in contrast you can make much more than 100% if the company does well. To wit, the Cloudflare, Inc. (NYSE:NET) share price has flown 225% in the last three years. Most would be happy with that. The last week saw the share price soften some 3.4%.

While the stock has fallen 3.4% this week, it's worth focusing on the longer term and seeing if the stocks historical returns have been driven by the underlying fundamentals.

Our analysis indicates that NET is potentially overvalued!

Cloudflare isn't currently profitable, so most analysts would look to revenue growth to get an idea of how fast the underlying business is growing. Shareholders of unprofitable companies usually expect strong revenue growth. That's because fast revenue growth can be easily extrapolated to forecast profits, often of considerable size.

In the last 3 years Cloudflare saw its revenue grow at 40% per year. That's much better than most loss-making companies. Along the way, the share price gained 48% per year, a solid pop by our standards. But it does seem like the market is paying attention to strong revenue growth. That's not to say we think the share price is too high. In fact, it might be worth keeping an eye on this one.

The graphic below depicts how earnings and revenue have changed over time (unveil the exact values by clicking on the image).

It's probably worth noting that the CEO is paid less than the median at similar sized companies. But while CEO remuneration is always worth checking, the really important question is whether the company can grow earnings going forward. You can see what analysts are predicting for Cloudflare in this interactive graph of future profit estimates.

A Different Perspective

Cloudflare shareholders are down 71% for the year, falling short of the market return. The market shed around 22%, no doubt weighing on the stock price. Investors are up over three years, booking 48% per year, much better than the more recent returns. The recent sell-off could be an opportunity if the business remains sound, so it may be worth checking the fundamental data for signs of a long-term growth trend. While it is well worth considering the different impacts that market conditions can have on the share price, there are other factors that are even more important. For example, we've discovered 4 warning signs for Cloudflare (1 shouldn't be ignored!) that you should be aware of before investing here.

We will like Cloudflare better if we see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on US exchanges.

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This article by Simply Wall St 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. Simply Wall St has no position in any stocks mentioned.