Cloudflare Inc: 5G Security Stock Has 390% Upside

Why Wall Street Is Bullish on Cloudflare Stock

5G wireless technology is transforming the telecommunications industry. 5G is touted as being 10 times faster, supporting 10,000 times more network traffic, and being able to handle 100 times more devices than 4G. It can do all this with one-fiftieth of the latency, and zero perceived downtime.

The GSMA, a mobile industry organization, estimates that, by the end of this year, 5G connections will account for 20% of all mobile connections worldwide, at more than one billion. By 2025, the number of 5G connections is expected to double. (Source: “The Mobile Economy 2022,” GSMA, February 28, 2022.)

All those interconnected devices are attractive targets for cybercriminals. This helps explain why, from 2022 to 2027, the 5G cybersecurity market is expected to grow from $1.3 to $7.2 billion. That translates to a compound annual growth rate (CAGR) of 41.6%. (Source: “5G Security Market by Component, Deployment Mode, Organization Size, End User, Network Component Security (RAN and Core Security), Architecture, Application, Vertical and Region – Global Forecast to 2027,” MarketsandMarkets, last accessed June 23, 2022.)

One cybersecurity company that’s expected to capitalize on this market is Cloudflare Inc (NYSE:NET).

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Cloudflare is a software company that offers cloud-based cybersecurity and Web services, including cloud, hybrid, on-premise, and software-as-a-service (SaaS) solutions. (Source: “Investor Presentation,” Cloudflare Inc, last accessed June 23, 2022.)

The company has more than 154,000 paying customers, blocks 117.0 billion cyberthreats per day, and serves 35 million HTTP requests per second.

Over 10% of the global Internet traffic goes through Cloudflare Inc’s network, and over one quarter of all web sites use the company’s solutions. The company has more than 270 cities (in more than 100 countries) in its network, and 47% of its revenue comes from outside the U.S.

From 2016 to 2021, Cloudflare Inc’s revenue expanded by a CAGR of 51%.

Cloudflare Inc generates over 50% of its revenue from large customers, and the number of its large customers has grown by a CAGR of 66% from the first quarter of 2019 to the first quarter of 2022. Moreover, its number of paying customers has increased by a CAGR of 28% from the first quarter of 2019 to the first quarter of 2022.

Cloudflare Kicks Off 2022 With “Terrific” Quarter

For the first quarter ended March 31, Cloudflare reported that its revenue increased by 54% year-over-year to $212.2 million. (Source: “Cloudflare Announces First Quarter 2022 Financial Results,” Cloudflare Inc, May 5, 2022.)

The company’s gross profit in the first quarter of 2022 was $165.1 million, or 77.8% gross margin, compared to $106.0 million, or 76.8% gross margin, in the first quarter of 2021.

Cloudflare Inc reported a first-quarter 2022 net loss of $41.4 million, or $0.13 per share, compared to a first-quarter 2021 net loss of $40.0 million, which also worked out to $0.13 per share.

The company reported first-quarter adjusted net income of $3.5 million, or $0.01 per share, versus a first-quarter 2021 adjusted net loss of $9.3 million, or $0.03 per share.

Cloudflare Inc ended the first quarter with cash, cash equivalents, and available-for-sale securities of $1.7 billion.

The company also reported a record addition of roughly 14,000 paying customers, bringing its total number of paying customers to 154,109.

“Cloudflare had a terrific first quarter of 2022, beating expectations with revenue growth up 54% year-over-year and adding more than 14,000 new paying customers—a quarterly record,” said Matthew Prince, Cloudflare Inc’s co-founder & CEO. (Source: Ibid.)

“Our largest customers continue to get larger, with those spending over $1M a year growing 72 percent year-over-year.”

Business Outlook & Share-Price Performance

For the second quarter of fiscal 2022, Cloudflare Inc expects to report:

  • Revenue of $226.5 to $227.5 million, compared to $138.1 million in Q1 2021
  • An adjusted loss from operations of $1.0 to $2.0 million, compared to an adjusted loss of $7.5 million in Q1 2021
  • An adjusted net loss of zero to $0.01 per share, compared to an adjusted net loss of $0.13 per share in Q1 2021

For full-year fiscal 2022, Cloudflare Inc expects:

  • Revenue of $955.0 to $959.0 million, compared to $656.0 million in 2021
  • Adjusted income from operations of $10.0 to $14.0 million, compared to an adjusted loss of $7.0 million in 2021
  • Adjusted net income per share of $0.03 to $0.04, compared to an adjusted net loss of $0.05 per share in 2021

Cloudflare Inc’s solid first-quarter results and upbeat guidance for the second quarter and full-year 2022 have resulted in a number of bullish calls for Cloudflare stock. That must provide some solace to investors, who have seen NET stock tumble by 69% year-to-date and 60% year-over-year.

Of the analysts providing a 12-month share-price forecast for Cloudflare Inc, their targets range from $55.00 to $200.00. This points to potential gains of approximately 35% to 390%.

Chart courtesy of StockCharts.com

Analyst Take

Cloudflare stock has taken a beating in 2022, but that has more to do with rising interest rates, soaring inflation, and fears of a recession than anything going on at Cloudflare Inc.

The company recently reported wonderful first-quarter results and strong guidance, which includes second-quarter revenue growth of 49% and full-year revenue growth of up to 46%. The company also expects to return to being free-cash-flow-positive in the second half of 2022.

With strong industry tailwinds in the 5G cybersecurity and emerging edge computing sectors, the outlook for Cloudflare stock is excellent.