Cloudflare Inc.’s (NET) suite of products “protect and accelerate any Internet application online.” The company offers a network that is scalable, unified, and easy to use. It delivers security, reliability, and performance across, hybrid, on-premise, cloud, and software-as-a-service (SaaS) applications.
I am neutral on this stock.
The company primarily generates revenues through subscriptions to access its network and products. Cloudflare’s customers include pay-as-you-go and contracted customers.
The company’s 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.
In Q2, the company’s revenues jumped 53% year-over-year to $152.4 million, surpassing consensus estimates of $146.06 million. NET’s non-GAAP net loss narrowed to $0.02 per share from $0.03 per share in the same quarter of last year. Analysts were expecting a loss of $0.03 per share.
The company exhibited a record customer growth in Q2 with an addition of 140 large customers, bringing its total large customers to 1,088.
Cloudflare has projected revenues of between $165 million and $166 million for Q3, while for FY21, it expects revenues to range from $629 million to $633 million. Non-GAAP net loss is expected to come in at $0.04 to $0.03 per share, and between $0.11 and $0.12 per share for Q3 and FY21, respectively. (See Cloudflare stock chart on TipRanks)
Following the strong Q2 results, Needham analyst Alex Henderson was upbeat about the stock. The analyst reiterated a Buy and raised the price target from $105 to $140 (9.8% upside) on the stock.
The analyst noted that NET’s accelerating growth rate in revenues set it apart. The company’s management noted on its earnings call that it had won some strategic deals during Q2 and that requires “us to increase investments in our network. Anticipating these deals, we began making increased investments in Q1. These investments continued in Q2 and we anticipate will continue through the second half of the year.”
Analyst Henderson was also positive about the company’s major government and strategic wins. Indeed, Cloudflare’s management said on its earnings call, “We partnered with Accenture Federal Services and won a contract with the Department of Homeland Security to offer our protection to all civilian executive branch agencies.”
According to the analyst, this deal is worth $112 million and is likely to “feather in during CY22 [calendar year 2022].”
Henderson estimates that NET’s revenues could grow between 30% and 50% over the next three to five years and could sustain gross margins “in the mid-to-high 70% range while delivering operating leverage.”
Moreover, the analyst noted that Cloudflare is “at an inflection point in its business model” as it pivots “from network investment and a freemium customer capture model to the development of deeper service functionality and a greater focus on large Enterprise adoption.”
Henderson added that the company’s investments in its network are “just reaching the sweet spot that combines new customer wins and accelerating Revenue growth.”
Turning to the rest of the Street, analysts are bullish about Cloudflare, with a Strong Buy consensus rating, based on 9 Buys and 3 Holds.
The average Cloudflare price target of $128.90 implies that the stock is fairly priced at current levels.
Disclosure: At the time of publication, Shrilekha Pethe did not have a position in any of the securities mentioned in this article.
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