Shareholders of Cloudflare (NYSE:NET) are on a roller coaster ride in 2023. Nonetheless, the stock of internet solutions and cloud-based cybersecurity service provider is still up about 23.7% year-to-date. In a note to investors dated May 8, Goldman Sachs analyst Gabriela Borges considers Cloudflare’s valuation unattractive and recommends a Sell, despite the company’s focus on improving sales and productivity and growing AI (Artificial Intelligence) applications.
The analyst sees “significant competitive strengths and longer-term platform optionality” for the company. However, NET stock is trading at a 35% premium to its peers based on Enterprise Value/sales/growth, noted Borges. Hence, the valuation seems expensive at the current levels.
Its investments to drive enterprise sales, continued growth in the large customer base (customers with $100K in annual revenue), and land and expand strategy have driven its revenue at a solid pace. It’s worth highlighting that Cloudflare’s top line has increased at a CAGR of 49% from 2017 to 2022.
Further, its large addressable market, new products, customer wins, and incremental growth opportunities from AI, IoT (Internet of Things), 5G, and network services are positives.
Cloudflare’s R2 (its storage product) is the infrastructure used by leading AI companies. The company said that the popularity of OpenAI’s ChatGPT and the sudden rise in the number of generative AI companies would drive cloud storage demand, and Cloudflare, with its low-cost R2 storage, is well-positioned to help companies migrate large volumes of data across clouds.
Overall, Cloudflare’s expansive product portfolio, low-cost structure, growing large customer base, high net retention rate, and subscription-based revenue model augur well for future revenue growth and margin expansion.
However, Borges believes that NET’s current valuation fairly reflects these positives, and the upside to the stock remains limited.
What’s the Prediction for Cloudflare Stock?
Overall, Cloudflare stock has nine Buy, 10 Hold, and one Sell recommendations for a Moderate Buy consensus rating. Further, analysts’ average price target of $52.94 implies a downside potential of 5.33% from current levels.
