Cloudflare Stock Up 221% This Year; Buying Opportunity on Horizon

cloudfare stockCloudflare Building the Future of Networks

Wireless networks are becoming more advanced in order to handle the increasing movement of data through both physical and cloud network infrastructures.

The increasing demand for complex and innovative network technology will accelerate and benefit companies like Cloudflare Inc (NYSE:NET), a global provider of cloud solutions for safeguarding and building Internet infrastructure.

NET stock has been on fire, surging from its March low of $15.05 to a record $61.86 on October 16. Up 221% this year, the stock has come a long way since its initial public offering (IPO) in September 2019.

Cloudflare stock is not cheap at its current level, but the market has been rewarding the company with a premium valuation because of its strong prospects. NET stock should be monitored for price weakness.

Advertisement

The Cloudflare stock chart shows a strong uptrend from the March low, followed by a breakout after an ascending triangle pattern.

But NET stock could be set for some price weakness and a buying opportunity. This is confirmed by the decline in its relative strength, and by its moving average convergence/divergence (MACD) near-term sell.

Chart courtesy of StockCharts.com

Booming Revenue Growth & Pathway to Profitability

A glance at Cloudflare Inc’s four-year revenue picture shows strong growth, with an impressive compound annual growth rate (CAGR) of 50.1%.

Fiscal Year Revenues (Millions) Growth
2016 $84.8 N/A
2017 $134.9 59.1%
2018 $192.7 42.8%
2019 $287.0 49.0%

(Source: “Cloudflare Inc. Cl A,” MarketWatch, last accessed November 4, 2020.)

The strong, double-digit revenue growth is expected to continue at 41.6% to $406.4 million this year, prior to moderating to 31.3% to $533.6 million in 2021. (Source: “Cloudflare, Inc. (NET),” Yahoo! Finance, last November 4, 2020.)

The lower forward growth rates are expected as the company begins to ramp up its operations.

Trading around 32 times the company’s estimated 2021 sales, NET stock is obviously not cheap, so any opportunity to add shares on price weakness would make sense.

Cloudflare Inc has been reporting negative earnings before interest, taxes, depreciation, and amortization (EBITDA) and losses on both a generally accepted accounting principles (GAAP) and adjusted basis.

Fiscal Year EBITDA (Millions) Growth
2016 -$8.7 N/A
2017 $2.4 128.2%
2018 -$66.0 -2,800.3%
2019 -$78.5 -18.9%

(Source: MarketWatch, op. cit.)

But as its revenues ratchet higher, watch for Cloudflare to improve its margins and move toward positive EBITDA.

Here are the figures for the company’s GAAP diluted earnings per share (EPS) in the past five years:

Fiscal Year GAAP Diluted EPS Growth
2016 -$0.06 N/A
2017 -$0.04 37.0%
2018 -$0.29 -710.8%
2019 -$0.72 -147.8%

(Source: MarketWatch, op. cit.)

On an adjusted basis, Cloudflare Inc lost $0.48 per diluted share in 2019. The company is expected to narrow this loss to $0.17 this year and to $0.13 in 2021. It could generate adjusted profits by 2022. (Source: Yahoo! Finance, op. cit.)

Free cash flow (FCF) is not a factor at this time as Cloudflare focuses on growth. What you want to see, however, is FCF improving as revenues rise.

Fiscal Year FCF (Millions) Growth
2016 -$31.9 N/A
2017 -$19.8 37.9%
2018 -$78.1 -294.4%
2019 -$96.2 -23.1%

(Source: MarketWatch, op. cit.)

Cloudflare Inc will have ample time to focus on growth without the need for new financing. The company’s working capital is extremely strong, with net cash of $656.0 million. (Source: Yahoo! Finance, op. cit.)

Analyst Take

Institutional ownership of NET stock has been rising, with 162 institutions owning 47.3% of the outstanding shares. I expect this to keep rising as the company’s fundamentals improve. (Source: Yahoo! Finance, op. cit.)

Insiders at Cloudflare Inc have been heavily buying shares of the company. Over the last six months, insiders bought 145.4 million shares and sold only 19.8 million shares. The buying occurred after the lock-up period ended on March 11. (Source: Yahoo! Finance, op. cit.)

Cloudflare stock will likely benefit from the strong tailwinds in the Internet network space as companies improve their networking infrastructure.