Cloudflare Stock Up 12% in September – Time to Buy NET Stock?
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The price of Cloudflare stock is up 12% so far in September following the continuation of the stock’s uptrend on the back of an upbeat Q2 2021 earnings report and the pricing of an upsized convertible senior notes offering that injected the company over $1 billion in capital.
An increasing number of cybersecurity incidents in the United States have managed to push the valuation of firms in this space like Cloudflare in the past two years while the pandemic has accelerated the rate at which businesses are adopting digital channels to reach more customers.
So far this year, shares of Cloudflare have jumped 78.5% on top of an eye-popping 345% gain the stock delivered last year amid the combination of these tailwinds.
Can this uptrend in NET stock continue during the last quarter of the year or is the sector as a whole starting to get overheated? In the following article, I’ll be taking a closer look at the price action and fundamentals of the business to possibly answer that question.
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Cloudflare Stock – Technical Analysis
Cloudflare shares have been on a relentless rally since May and the stock’s short-term moving averages have acted, thus far, as support during the mild drops the price has experienced since then.
However, momentum readings have been on a downtrend since July as they have been making lower highs despite the price of NET stock advancing to record levels.
This phenomenon is commonly known as a bearish divergence and it indicates weakness in the current trend. As a result, this setup could be signaling an upcoming reversal if at some point we get a break below the 50-day simple moving average.
Yesterday’s candle was particularly concerning as significant selling pressure plunged the price more than 4% during the session although bulls managed to trim that decline to 1%. This thug of war led to the formation of a hanging man candle that may be signaling a short-term top for Cloudflare stock. Trading volumes are favoring this bearish as well outlook as they exceeded the 10-day average.
Moving forward, if the price breaks below its 50-day moving average, a full-blown trend reversal may fully unfold. On the other hand, if that support continues to hold, this latest weakness could turn out to be a buying opportunity as the price action would be poised to resume its uptrend, similar to what has happened in previous instances.
Cloudflare Stock – Fundamental Analysis
Revenues for Cloudflare have been growing at an accelerated pace in the past five years, moving from $85 million back in 2016 to $431 million last year at a compounded annual growth rate of 50%.
Meanwhile, for this upcoming 2021 fiscal year, sales are expected to land at $629 million according to the management’s guidance, which would result in a 46% year-on-year jump.
During that same period, gross margins have remained above 76% but negative GAAP operating margins have remained quite elevated, landing at 23.3% last year and 18.8% in the past twelve months. Meanwhile, Its adjusted non-GAAP operating margins have been progressively improving from minus 30% in 2018 to minus 8% last year and minus 3% during the second quarter of 2021.
The company has also reported accelerated growth in the number of customers paying over $100,000 per year and in its total paying customer base.
Moreover, according to its latest investor presentation, the company estimates a total addressable market (TAM) of around $100 billion for its services by 2024, which points to the possibility that Cloudflare may just be scratching the surface of the growing internet security market.
At its current market capitalization of $42.4 billion, the company is trading at over 40% its TAM.
The valuation at the moment seems particularly stretched unless there is a notable improvement in the company’s bottom-line results. In this regard, most of the potential of the business seems priced in and that favors a long-term bearish outlook.
A plausible base-case scenario for Cloudflare is that the price may trade range-bound for a while as even the most optimistic bull case has already been realized.
Analysts ratings reflect how stretched the valuation is as the stock price is currently trading 22.3% above the consensus estimate of $111 per share while it is fairly close to the highest estimate of $140 per share from Argus and Needham based on data compiled by MarketBeat.