Shares of Cloudflare (NYSE: NET) have been on a downslide with the stock falling 19% in early morning trading on Friday. The stock is currently hovering near its yearly low of $64.84.
This downslide has been a surprise even as the content delivery network (CDN) company delivered upbeat Q1 earnings. According to BTIG analyst Gray Powell, this downslide has been a result of “lower than expected OCF and underlying (secondary) metrics like RPO [Remaining Performance Obligations] and billings that moderately decelerated off of tough comps.”
Powell added that this has been combined “with an unforgiving market for growth stocks.”
Indeed, in Q1, Cloudflare’s OCF was a negative $35.5 million or 70% of its revenues, versus $23.5 million in the same period last year.
The company’s management stated on its Q1 earnings call that the drop in OCF was “primarily related to a unique withholding tax payment of approximately $30 million.” However, the company reiterated that it continues to anticipate “to return to positive free cash flow in the second half of this year.”
Cloudflare’s Q1 revenues soared 54% year-over-year to $212.2 million, surpassing the consensus estimate of $205.65 million.
Company management pointed out on its Q1 earnings call that the rise in revenues was “driven by strong adoption of our product portfolio and continued traction with our enterprise customer base,” and even geographically, NET saw continued strength in revenues in the U.S. and internationally.
Earnings came in at $0.01 per share in Q1, versus a loss of $0.03 per share reported in the prior-year quarter, while analysts were expecting the company to break even.
When it comes to customer metrics, Cloudflare exited Q1 with 154,109 paying customers, up 29% year-over-year. The rise in paying customers also resulted in NET’s dollar-based net retention rate of 127%, up from 123% year-over-year.
Cloudflare also addressed the issue of slowing Internet traffic that has been experienced by other cloud-centric companies over its earnings call.
Matthew Prince, Cloudflare co-founder and CEO, pointed out that on the contrary, Internet traffic grew across its network by 75.8% while CPU usage grew by 89.1%. These statistics indicate the utilization of its network.
Prince added, “It’s worth remembering that we don’t bill primarily based on usage. We bill in a much more predictable way. And so I think that that is a good indication that we are taking share from the rest of the industry.”
It is important here to look at how NET generates revenues. The company primarily generates revenues through subscriptions to access its network and products. Cloudflare’s customers include pay-as-you-go and contracted customers.
Pay-as-you-go customers can purchase its products through its website, while Cloudflare’s contracted customers can enter into contracts for the company’s enterprise subscription plan. These contracts range from one to three years.
Powell feels that the above numbers are important as it “illustrates that customers are using multiple products – from which NET generates revenue.”
The analyst noted a number of key positives for the stock. Powell believes that in NET’s “core markets alone, we believe NET could reasonably grow at a 40% pace the next four years by simply maintaining its current pace of win rate.”
Powell remained confident “in NET’s ability to gain share in its core target markets and believe Cloudflare Teams represents a compelling growth opportunity in the SASE [Secure Access Service Edge] space.”
The analyst also anticipates that NET will maintain a revenue growth rate of 50% this year. However, the analyst remained sidelined on the stock with a Hold rating as he thinks “the risk reward is balanced.”
Wall Street’s Take
Wall Street analysts are cautiously optimistic about the stock, with a Moderate Buy consensus rating based on nine Buys and nine Holds. The average NET stock forecast is $128.41, implying 88.9% upside potential to current levels.
Discover new investment ideas with data you can trust.
Read full Disclaimer & Disclosure
