Cloudflare Stock: Cybersecurity Play Down 80%; Time to Consider It?

Cloudflare Stock: Cybersecurity Play Down 80%; Time to Consider It?

NET Stock Presents Opportunity to Contrarian Investors

The world is in a mess right now, given the problems with Russia and the intensifying cold war with China. And that doesn’t even include domestic threats. In this environment, cyberattacks are expected to continue on business and government IT networks and Internet infrastructure.

A cybersecurity stock that has plummeted by a whopping 66% in 2022 to a level that warrants taking a look is Cloudflare Inc (NYSE:NET). The company is a global provider of cloud solutions that safeguard and build networks and Internet infrastructure.

At its high point in November 2021, Cloudflare stock traded as high as $221.64. With its shares down by 80% from their high, Cloudflare Inc currently offers an intriguing risk/reward opportunity for contrarian investors.

Chart courtesy of StockCharts.com 

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Cloudflare Inc on Pace to Break Billion-Dollar Revenue Threshold

Cloudflare Inc has displayed steady, double-digit-percent revenue growth over the last four consecutive years.

Its revenues increased by an impressive 385% from 2017 to their record $656.4 million in 2021. During that period, the company generated a revenue compound annual growth rate (CAGR) of 48.5%.

And Cloudflare Inc’s revenue growth isn’t expected to let up.

Analysts forecast that the company’s revenues will maintain double-digit-percent growth over the next two years. Their current estimates have Cloudflare ramping up its revenues by 48.5% to $974.7 million in full-year 2022 and by 35.3% to $1.3 billion in 2023. (Source: “Cloudflare, Inc. (NET),” Yahoo! Finance, last accessed December 23, 2022.)

Even with the company’s high expected revenue growth, Cloudflare Inc trades at 12.4 times its consensus 2023 revenue estimate. Not cheap, but far more affordable than in the past.

Fiscal YearRevenues (Millions)Growth
2017$134.9N/A
2018$192.742.8%
2019$287.049.0%
2019$431,150.2%
2021$656.452.3%

(Source: “Cloudflare Inc. Cl A,” MarketWatch, last accessed December 23, 2022.)

Cloudflare’s earnings before interest, taxes, depreciation, and amortization (EBITDA) started improving in 2020 and reached a four-year best in 2021. Given the company’s revenue growth, it could deliver positive EBITDA by 2023.

Fiscal YearEBITDA (Millions)Growth
2017$2.4N/A
2018-$66.0-2,800%
2019-$88.8-34.5%
2020-$41.353.4%
2021-$27.234.1%

(Source: Ibid.)

On its bottom line, Cloudflare Inc has been losing money based on generally accepted accounting principles (GAAP) diluted earnings per share (EPS).

Analysts are optimistic about the company’s adjusted earnings. They expect Cloudflare to report an adjusted profit of $0.11 per diluted share in 2022 and $0.15 per diluted share in 2023. (Source: Yahoo! Finance, op. cit.)

Fiscal YearGAAP Diluted EPSGrowth
2017-$0.04N/A
2018-$0.29-710.8%
2019-$0.35-20.8%
2020-$0.40-12.9%
2021-$0.83-109.3%

(Source: MarketWatch, op. cit.)

Cloudflare Inc’s free cash flow (FCF) isn’t critical at this time as the company focuses on growing its business. Nevertheless, its FCF loss narrowed in 2020 and improved to a four-year best in 2021.

Fiscal YearFCF (Millions)Growth
2017-$19.8N/A
2018-$78.1-294.4%
2019-$96.2-23.1%
2020-$71.425.8%
2021-$20.072.0%

(Source: MarketWatch, op. cit.)

Cloudflare Inc’s balance sheet has strong working capital, cash of $1.6 billion, and a manageable debt of $1.6 billion. (Source: Yahoo! Finance, op. cit.)

Analyst Take

Cloudflare stock has attracted institutional ownership over the past few years. Currently, 844 institutions hold 86.5% of NET stock, up from less than 50% a few years ago. Moreover, company insiders added a net 113,904 shares of Cloudflare Inc to their portfolios over the last six months. (Source: Yahoo! Finance, op. cit.)

My bull story on Cloudflare stock is that the company will benefit from the strong tailwinds in the networking and infrastructure cybersecurity sector.