Shares of the web infrastructure and security company Cloudflare (NET) have regained momentum ahead of the Q3 print (scheduled on November 4).
To give a little background, the uptrend in Cloudflare stock paused for a while over concerns regarding valuation and growing competitive activity. However, its stock has gained over 60% in October, implying that investors remain upbeat about its Q3 earnings. Further, Cloudflare stock has risen over 210% in one year.
The rally in Cloudflare stock is supported by its robust financials. Its revenues are growing fast and have accelerated on a sequential basis. Meanwhile, its adjusted operating losses have narrowed down. I maintain a Bullish outlook on Cloudflare stock.
The expansion of its addressable market and capabilities through product innovation is the key to its success. Additionally, strong growth in Cloudflare’s large enterprise accounts (customers with annualized revenue of over $100,000) and high dollar-based net retention rate have been boosting its financial performance.
While Cloudflare’s financials impress, its valuation remains a concern. Thanks to the appreciation in value, Cloudflare stock is trading at an NTM (next 12-month) EV/Sales multiple of 76.2, much higher than its historical average.
Citing its expensive valuation, Andrew Nowinski of Wells Fargo initiated coverage on Cloudflare stock with a Hold rating and price target of $122 (32.5% downside potential). Nowinski expects Cloudflare to gain from the ongoing digital transformation. However, he sees positives already priced into Cloudflare stock.
Another area of concern is the growing competitive landscape. Naming Amazon (AMZN) and Microsoft (MSFT) as realistic competition to NET, Oppenheimer analyst Timothy Horan downgraded Cloudflare stock to Hold.
Nevertheless, Wall Street expects Cloudflare to report revenues of $165.6 million in Q3, reflecting year-over-year and sequential growth of 45% and 9%, respectively.
Overall, Cloudflare stock sports a rating consensus of Moderate Buy, based on 6 Buys and 6 Holds. Meanwhile, Cloudflare scores a 7 out of 10 from TipRanks’ Smart Score rating system, indicating that it is likely to perform in line with market averages.
The average Cloudflare price target of $133.20 implies 26.3% downside potential to current levels.
Disclosure: On the date of publication, Amit Singh had no position in any of the companies discussed in this article.
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