Owning Cloudflare (NYSE:NET) stock is life on the bleeding edge of technology, security and fast content delivery. It’s exciting. It can be wildly profitable, but it’s also an area subject to wild swings of sentiment.
Cloudflare runs reverse proxy servers to assure clients their Web traffic is safe.
How fraught is it? One flaw in the open source version of Cloudflare’s server recently left 12.7% of all Web sites vulnerable to attack. The flaw was found by a security researcher in April and there is no evidence it was exploited.
How profitable is it? Cloudflare trades for about $117 with a market cap of $36.4 billion on estimated 2021 revenues of under $500 million. President and co-founder Michelle Zatlyn recently became a billionaire.
What Cloudflare Does
Cloudflare is the outgrowth of an open source project originally called Project Honey Pot, designed to monitor Internet abuse. It came public less than two years ago, at $15 per share.
Attracting rogue code gives security time to identify and possibly disable it, which can stop distributed denial of service (DDoS) attacks. Protecting code on-the-fly let Cloudflare develop its Content Delivery Network (CDN) , which caches content across over 200 data centers, to speed its delivery.
Security has become Cloudflare’s calling card. DDoS protection alone is growing at 15% per year, and should be worth over $4 billion in 2023. Cloudflare’s CDN can also protect against ransomware, the threat of the moment.
Fast Growth
The result has been fast growth but, so far, no profits. Revenue for Cloudflare’s March quarter was 51% ahead of a year earlier, with losses widening from 11 cents per share to 13 cents. Operating cash flow during the quarter was positive, however . The stock’s value is up 54% so far in 2021.
Cloudflare is next expected to report earnings Aug. 5. Revenue is expected to be $147 million, against $100 million a year ago, with another loss of $35 to $40 million, or 12 cents per share. Investors will be looking at the growth rate, analysts at the cash flow numbers.
Right now, nine of the 12 analysts following Cloudflare stock at Tipranks suggest you buy it, but their price target is below where it currently trades, the product of a super-heated market.
Becoming an Institution
Cloudflare’s main business challenge is to become an institution among its customers, an expected expense.
That means getting listed in the FEDRamp marketplace, the federal government’s cloud security assessment. Full authorization could dramatically increase uptake among government agencies.
It means getting into large public clouds, like that of IBM (NYSE:IBM), as an add-on service. It means integrating with security log systems like Microsoft’s (NASDAQ:MSFT) Azure Central, and funneling those statistics to analytics platforms.
All this is being done against the backdrop of Covid-19. That has created a work-from-home environment Cloudflare takes advantage of in its marketing. But it’s something Zatlyn would like to end.
The Bottom Line on NET Stock
Security and content delivery both accelerated under Covid-19, and these markets should continue to explode.
That’s why so many analysts are recommending NET stock, despite its high price.
Fast, managed growth, with investment just ahead of the growth curve, is not to be sneezed at. It’s how the tech business works. Cloudflare stock is pricey, and getting pricier by the day. A single negative headline can still hit the stock hard.
That makes NET stock one to put on your buy list, waiting for that negative moment. I don’t like to get into companies when they’re riding high. Nothing grows straight to the sky. My guess is that, if you watch NET stock carefully, you’ll be able to get in below its current price. But it’s worth buying.
On the date of publication, Dana Blankenhorn held a long position in MSFT. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Living With Moore’s Law: Past, Present and Future available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.