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Cloudflare stock: Rule of 40 points to overvaluation pre-earnings

By: Invezz

Cloudflare (NYSE: NET) stock price has moved sideways this year as concerns about its growth and valuation remain. It has risen by about 5% this year and by almost 100% in the past 12 months, giving it a market cap of over $30 billion.  

Cloudflare earnings ahead

Cloudflare has been one of the fastest-growing companies in the United States, helped by the rising demand of its products. It has become the company to go to for most developers looking for CDN networks. 

The company’s revenues have risen sharply in the past few years. Annual revenue soared from $287 million in 2019 to over $1.29 billion in 2023. Analysts believe that the company’s growth will continue in the foreseeable future.

The median estimate is that Cloudflare’s revenue will get to $1.6 billion this year and $2.12 billion in 2026. This growth has, however, come at a great cost as the company’s net loss has jumped to over $860 million in the past five years.

Analysts expect that Cloudflare’s first-quarter revenue will come in at $373 million followed by $393 million in Q2. 

The most recent results showed that the company’s revenue rose by 32% to $362.5 million in Q4. It had a net loss of $27.9 million during the quarter. It continued growing its large customers with over $100k in annual revenue to 2,756. 

Cloudflare believes that it can scale its business profitably in the coming years. It aims to do that by reducing the percentage of sales and marketing as a percentage of revenue to between 27% and 29% from the current 40%. It also aims to do the same in R&D and S&A costs to 20% and 10%. The result is a company with an operating margin of over 20%.

A key concern among investors is that Cloudflare is severely overvalued. It has a forward PE ratio of 153, which is significantly higher than the sector median of 23. In other words, the company trades at a forward price to sales (2024) multiple of 18.75, which is not cheap.

For SaaS companies, a good approach is to do the Rule of 40 valuation metric, which is calculated by adding a company’s growth and its margins. In this case, Cloudflare is growing at about 32% compared to its net income margin of -14.20%, giving it a figure of 17.20. 

Cloudflare stock price forecast

NET chart by TradingView

Turning to the daily chart, we see that the NET stock price peaked at $221 in 2021 as SaaS companies surged. It then dropped to a low of $36.4 in 2022 as global stocks plunged. It has now bounced back and moved above the 23.6% Fibonacci Retracement level. 

The stock has jumped above the 200-day Exponential Moving Average (EMA). It has moved between the first and second support levels of the Woodie pivot point. It is also between the lower and first support levels of Andrew’s pitchfork tool.

The outlook for the stock is neutral with the key levels to watch being the Woodie pivot point at $97.5 and April’s low of $83. The average estimate for Cloudflare stock by analysts is $100.54, higher than the current $87.40.

The post Cloudflare stock: Rule of 40 points to overvaluation pre-earnings appeared first on Invezz

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