Cloudflare Is a Buy as New Services Pave the Way for Growth

Stocks to buy

Cloudflare (NYSE:NET) appears to remain in an unattractive category despite its superior quarterly results. NET stock has since fallen 28% following its earnings announcement on May 5. Although guidance for revenue has been raised, the company expects earnings to be lower or remain the same as previously forecast levels.

For the first quarter of 2022, management disclosed it expects to post adjusted loss of 1 cent per share or break even with revenue between $226.5 million and $227.5 million. Consensus estimates for the quarter had been $0 per share on revenue of $217.9 million. Although revenue is likely to be higher than expectations, earnings might be lower than forecast.

Full-year guidance for revenue was raised to the range of $955 million to $959 million, up from its earlier estimate of $927 million to $931 million. But the outlook for earnings remained intact in the range of 3 cents to 4 cents per share.

The Q1 2022 outperformance was completely overshadowed by disappointing earnings guidance. I expect this decline in share price and resulting valuation presents a buying opportunity for astute investors.

My viewpoint is further supported by analyst consensus ratings. Based on 15 analysts on Wall Street, seven have rated the stock as a “buy.” The average price target is $104.46 with a high of $200 and a low of $60. That’s an upside potential of 7% even for the lowest price target. The average target represents an 88% upside from today’s price.

Most recently, Forrester Research rated the company’s cloud platform as better than the offerings of other tech players, including giants like Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) and Amazon (NASDAQ:AMZN).

This is already reflected in the company’s growing number of paying customers, which rose 29% in Q1 2022 to 154,109. Further, customers spending over $1 million per year grew 72% from the last year.

Dollar-based net retention rate has grown to 127%, reflecting an average consumer that is paying 27% more. This ratio has steadily improved from 125% in FY 2021 and 119% in FY 2020.

Cloudflare’s ability to innovate and consolidate power multiple network services at scale to enhance connectivity and speed provides it a competitive advantage over peers.

Most recently, the company launched a service that allows users to change any fixed application into a programmable platform. Therefore, a developer can build and customize their platform using the latest open API standards without having to invest in external servers.

Another innovation has been Cloudflare D1, which will enable developers to build database-backed applications using Cloudflare Workers with just a few clicks. The launch will eradicate any complexity associated with installing or managing a traditional database.

I believe NET stock is poised to grow at an accelerated pace on the back of these innovation. The company’s share price will skyrocket as it expands its services.

On the date of publication, Sakshi Agarwalla did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Sakshi Agarwalla has more than eight years of experience writing equity research reports and preparing financial models for companies across various industries, as well as writing newsletters and financial articles. Recently, she assisted her Fund manager in executing trades, preparing weekly, monthly NAVs and writing newsletters. She has a postgraduate degree in finance and has completed CFA.

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