Cloudflare Stock: 57% Sell-Off Provides Contrarian Investment Opportunity

Ukraine Situation Ramps Up Need for Cybersecurity Companies like Cloudflare Inc

The Russia/Ukraine war hasn’t been limited to the physical battlefield; there have also been major cyberattacks on Ukrainian assets. Cyberattacks were already ratcheting up long before this conflict, and they’ll likely worsen after the war is over.

There’s no doubt that the demand for cyber defense solutions will keep rising and provide strong tailwinds for companies like Cloudflare Inc (NYSE:NET), a global provider of cloud solutions to build and safeguard Internet infrastructure.

This high demand is reflected in Cloudflare’s double-digit revenue growth. Moreover, the company is well positioned to develop and protect the networks and infrastructure assets of the future.

However, the recent drubbing of technology stocks has punished NET stock. It has plummeted by 37% over the last three months and by 57% from its high of $221.64 in November 2021. With this sell-off, Cloudflare stock presents a nice contrarian risk/reward opportunity.

Chart courtesy of StockCharts.com

Revenues Approach $1 Billion

Cloudflare Inc’s revenues grew by 385% from 2017 to a record level in 2021, with four consecutive years of double-digit growth. During that time, the company produced an impressive compound annual growth rate (CAGR) of 48.5%.

The company’s revenue growth is expected to continue in the double-digits over the next two years. Analysts estimate that Cloudflare will produce revenue growth of 41.9% to $931.2 million in 2022 and 35.6% growth to $1.3 billion in 2023. (Source: “Cloudflare, Inc. (NET),” Yahoo! Finance, last accessed March 14, 2022.)

(Source: “Cloudflare Inc. Cl A,” MarketWatch, last accessed March 14, 2022.)

Shifting to Cloudflare’s earnings before interest, taxes, depreciation, and amortization (EBITDA), there was an improvement in 2020 and a four-year best in 2021. Given the company’s revenue growth, it could deliver EBITDA income in 2022.

(Source: MarketWatch, op. cit.)

At the bottom line, Cloudflare Inc has been losing money based on generally accepted accounting principles (GAAP) earnings per share (EPS).

Adjusting for non-recurring expenses, the company lost $0.02 per diluted share in 2021. It’s expected to break even in 2022, followed by profits of $0.03 per diluted share in 2023. (Source: Yahoo! Finance, op. cit.)

(Source: MarketWatch, op. cit.)

Cloudflare Inc’s free cash flow (FCF) isn’t a factor at this time as the company focuses on growing its business. On the plus side, the company’s FCF loss narrowed in 2020 and improved to a four-year best in 2021.

Watch for Cloudflare’s FCF to turn positive in 2022 as its revenues rise and profitability approaches.

(Source: MarketWatch, op. cit.)

Cloudflare Inc’s balance sheet shows significant working capital, cash of $1.8 billion, and manageable debt of $1.3 billion. (Source: Yahoo! Finance, op. cit.)

Analyst Take

Cloudflare stock has been increasingly attracting institutional ownership over the past few years. Currently, 907 institutions hold 87.5% of the shares, versus less than 50% a few years ago. (Source: Yahoo! Finance, op. cit.)

Cloudflare Inc trades around 30 times its consensus 2023 revenue estimate. This isn’t cheap, but given NET stock’s price deterioration, it’s a far better entry point than in 2021.