Cloudflare Inc.: Evaluating Its Growth Potential and Risks

Should You Invest in Cloudflare Stock? A Comprehensive Analysis

Investors at Cloudflare (NET -0.33%) had a miserable year as the company’s shares lost 43% of their value. The decline coincided with a larger stock market sell-off that was brought on by rising interest rates and soaring inflation. However, the stock’s fortunes have taken a significant turn for the better in 2023, and the price has increased by 45% since the year’s beginning.

The market’s response to declining inflation and a likely halt in Federal Reserve interest rate hikes is also a factor in this fantastic 2023 gain. Should investors purchase Cloudflare stock in anticipation of further gains, nevertheless, given that it is still substantially below its 52-week high? Let’s investigate.

Though the price of Cloudflare stock is high, just part of the tale

When compared to the S&P 500’s sales multiple of 2.4, Cloudflare’s price-to-sales ratio of 21.6 indicates that the stock is trading at a relatively rich valuation. It is important to remember that before the current surge began, the stock was trading at a lower sales multiple of 16 at year’s end. Due to the company’s excellent growth prospects, investors who missed buying Cloudflare before the end of 2022 will now have to pay a higher valuation to do so.

Cloudflare Stock: A Smart Investment Opportunity or a Risky Bet?
Cloudflare Stock Analysis: Pros and Cons for Investors

For investors that have a higher tolerance for risk, doing so might not be a bad idea. That’s because Cloudflare is currently more affordable than it was last year.

It was trading at more than 50 times sales a year ago, as the figure above illustrates. Investors seeking for a growth stock can still think about purchasing this cloud play, even if experts predict Cloudflare to provide roughly 70% upside over the coming year. There are a few straightforward reasons for this.

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Here’s why it’s still a buy on the stock.

The enormous addressable market that Cloudflare is aiming for is expected to reach $135 billion in 2024 from $115 billion in 2022, according to the firm. This growth will be fueled by the rising demand for the wide range of services that the company provides. The business offers services in a number of areas, including content delivery networks (CDNs), network and storage services, intrusion and detection prevention, firewall, and virtual private network (VPN).

It’s also important to note that Cloudflare dominates a number of rapidly expanding markets. For instance, the corporation purportedly holds 47% of the CDN market, which Grand View Research projects would expand at a 23% annual rate until 2030. In addition, Cloudflare sees room for modest expansion in industries like the Internet of Things and 5G. The company’s revenue has been rising at an astounding rate over the years, which may be attributed to these profitable end markets.

In 2022, Cloudflare reported a 49% increase in revenue to $975 million. A non-GAAP net income of $0.13 per share was also reported last year, up from a loss of $0.05 per share in 2021. The company’s phenomenal growth has been largely attributed to the steady expansion of its customer base and its capacity to encourage customers to make additional purchases.

For instance, from 1,416 in 2021 to 2,042 in 2018, clients who spent at least $100,000 on Cloudflare’s products in the previous 12 months increased significantly. In addition, the number of clients who purchased at least $500,000 worth of company products in the previous 12 months rose by an astounding 83% to 222 in 2022.

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It should come as no surprise that Cloudflare will continue to experience strong top-line growth.

Additionally, during the following five years, its earnings are anticipated to increase at a rate of 47% per year. Therefore, it won’t be unexpected if Cloudflare achieves the fantastic results that experts are anticipating. Therefore, long-term investors wishing to purchase a growth company now might want to move swiftly in order to avoid missing out as Cloudflare soars higher and increases in price.

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