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Monday, June 5, 2023

Expect Cloudflare Stock Enthusiasm to Cool, Following Earnings

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As trends remain firmly on its side, Cloudflare (NET) stock continues to climb. Since its brief pullback in early May, shares in the cloud-based cybersecurity company have rallied nearly 72%, from around $69 per share to around $118 today.

But this could come to a halt once the company’s results for the second fiscal quarter (ending June 30, 2021) are released after the market closes on August 5.

Why? Perhaps not due to the results themselves. Given the revenue guidance it provided for the June quarter, and its beat of analyst estimates for the March quarter, there may be a low likelihood it falls short of expectations. 

Yet after its strong run in recent months? Investors may decide to take the opportunity to “sell on the news.” This is not to say shares are set to go into sell-off mode. Yet investors in the near-term could start taking a more cautious approach to the stock. (See Cloudflare stock charts on TipRanks)

NET Stock and its Upcoming Quarterly Results

Cloudflare is likely set to have another strong quarter. Still scaling up to the point of profitability, sales growth will likely remain the key figure among investors. That’s opposed to earnings-per-share (EPS), which, like in the preceding quarter, is expected to come in as negative for the recent quarter.

What are Wall Street analysts expecting when it comes to revenue? Back in May, when it released its numbers for the fiscal quarter ending March 31, 2021, revenues came in at $138.1 million, slightly above sell-side consensus of $131 million. As for the company’s June quarter guidance, the company provided a range of between $145.5 million to $146.5 million. Again, that was ahead of consensus ($139.1 million).

Given that it has already been up substantially over the past few months, market participants may be less willing to put more points into NET stock following earnings. Again, as mentioned above, investors could decide it’s the right time to take profit on their gains.

Another factor that could influence profit-taking in the weeks ahead is the increasing risk that growth stocks are set to experience multiple contraction. That is, a reduction in forward price-to-sales (P/S) and price-to-earnings (P/E) multiples.

Despite Strengths, Still at Risk of Multiple Contraction

So far in 2021, valuation concerns have only briefly affected NET stock. Worries that rising inflation may point to a sooner-than-expected rise in interest rates, which would dent growth stock valuations, have come and gone a few times this year. On each occasion, investors have shrugged them off, thanks to the “inflation is transitory” thesis.

Currently, Cloudflare shares trade for around 55x projected 2021 sales, and 45x projected 2022 sales. On an absolute basis, this may appear to be an unsustainable valuation. But if you take a look at the details, it makes sense that this growth stock continues to command a premium valuation.

With its strong customer retention and ability to upsell, it’s clear the company has many advantages over its rivals in the cloud-based cybersecurity space. Also, with the potential for its addressable market to expand more than three-fold over the next three years (from $32 billion to $100 billion), it’s clear its days of high growth aren’t ending anytime soon.

Yet, as with other high-flyers, the days of “growth at any price” could be coming to a close. What will happen if today’s issues inflation prove to be more than “transitory,” and Central Banks around the world are forced to raise interest rates? Growth stocks could correct, and then face challenges bouncing back to prior highs.

What Analysts are Saying about NET Stock

According to TipRanks, NET stock has a consensus rating of Strong Buy. Out of 12 analyst ratings, 9 rate it a Buy, 3 analysts rate it a Hold, and 0 analysts rate it a Sell.

As for price targets, the average Cloudflare price target on NET stock today is $100.70 per share, implying around 14.8% in downside from today’s prices. Analyst price targets range from a low of $85 per share, to a high of $125 per share.

TipRanks’ Smart Score

NET stock has a TipRanks’ Smart Score of 9 out of 10 (Outperform). Sentiment among TipRanks investors comes in as Very Positive. Moreover, Blogger Opinions are bullish on the stock.

Bottom Line: Cloudflare Could Cool From Here

Cloudflare may be set to deliver strong results when it releases earnings this week. However, that may not necessarily translate into continued higher prices for NET stock.

Instead, investors may decide to “sell on the news.” This may result in either a pullback or sideways trading, especially if valuation concerns for growth stocks picks up once again.

Disclosure: Thomas Niel held no position in any of the stocks mentioned in this article at the time of publication.

Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.

The post Expect Cloudflare Stock Enthusiasm to Cool, Following Earnings appeared first on TipRanks Financial Blog.

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