While slowing down in recent days, the Cloudflare (NYSE:NET) rally that started in October has carried on into this month. Sparked initially by the Facebook (NASDAQ:FB) outage early last month, the extended surge has sent NET stock more than 71% in little over a month, from around $115.75 per share, to around $200 per share today.
A solid quarterly earnings report, released on Nov 4., shows Cloudflare topping estimates on both revenue and earnings. This content delivery, online security, and web infrastructure company has yet again shown it’s a bona fide growth story.
However, it appears now this latest run up is slowing down. Some who got in a few months back at lower prices appear to be selling into strength. Others may be holding off buying it, waiting for additional weakness.
So, as this starts to play out, what’s the best approach?
Yes, Cloudflare’s days of delivering jaw-dropping annual returns may be behind it. Considering that its stock price raised around 200% over the past 12 months, and around ten-fold since the start of the Covid-19 pandemic. I wouldn’t count it doubling or tripling in price again anytime soon.
However, if you’re looking for a long-term growth play, that stands to deliver more modest, but nonetheless solid returns going forward. Then you may want to buy some NET stock.
NET Stock and its Latest Earnings Report
For the quarter ending Sep. 30, Cloudflare topped estimates yet again. With both its top line and bottom line results. Generating $172.3 million in revenue during the quarter (up 51% year-over-year), it came in ahead of analyst estimates, calling for $165.7 million in sales.
Pessimistic analysts had projected NET stock would post quarterly losses of 4 cents per share. Instead, the company delivered breakeven earnings per share (EPS), which may signal that it’s on the verge of getting out of the red, and to the point of consistent profitability.
Along with its earnings beat, Cloudflare also raised its full-year guidance for 2021. Before, it expected to generate between $629 million and $633 million in sales this year. Now, the cloud services provider expects sales of between $647 million and $648 million. Adding scores of new large customers (170 to be exact), it’s no head scratcher how this company has, yet again, beat the high expectations investors have for it.
With its months-long rally losing steam, it’s understandable if you think it’s too late to enter a position. Especially since the stock sports the overvalued label. Its days of making rapid moves may be over. But there’s still plenty left on the table to make it a worthwhile long-term buy at present prices.
Valuation and The Prospect of Gradual Gains Ahead
There’s no getting around the fact that NET stock trades at a rich valuation. At today’s prices, shares trade for about 100x estimated revenues for 2021, and 76x estimated revenues for 2022. That’s pricey. Even for a fast-growing tech name.
That said, it’s erroneous to think that “overvalued” means “a bubble ready to pop.”
A rich valuation alone does not always cause an eventual collapse in price. As long as the conditions that made it “overvalued” in the first place stay constant. Fortunately, that’s the case here with Cloudflare. Like other large tech stocks, pandemic-related tailwinds have played a major role in its stock price performance from March 2020, through today.
But the demand for CDN (content delivery network) and other services isn’t going away. Even as the world’s largest economies are now in “recovery mode” from the pandemic. Cloudflare retained the clients it gained in 2020, and has added many more to that list. The company appears set to deliver above-average revenue growth in the years ahead.
Again, this may not translate into another incredible run-up in price. But if the trends seen in its latest results continue, then gains from here may come in more gradually. It won’t have much trouble hitting new all-time highs down the road.
The Verdict on Cloudflare Stock
Coming in with a “B” rating in Portfolio Grader, Cloudflare remains a solid stock to buy and hold for the long term. Another 2x or 10x run-up in price may not be in the cards in the coming year or two. Yet, if it continues to beat expectations, retains its existing client base, and successfully adds more large enterprise customers to its portfolio then it’ll be solid growth stock for years to come.
Shares will be able to overcome valuation concerns, and stand to steadily add to the incredible gains seen with the stock over the past few years. As some investors are pulling back right now, and taking profits after Cloudflare’s latest earnings report, it might be the time to initiate a position in NET stock.
— Louis Navellier and the InvestorPlace Research StaffChatGPT's IPO - is this the final clue? [sponsor]
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Source: Investor Place