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Cloudflare Earnings Preview: Time to Sell the Rally?

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Cloudflare (NET - Free Report)  is a cloud-based cyber security company set to report Q4 earnings on Thursday, February 9 after the market closes.

Cloudflare provides a variety of internet security services through an integrated cloud-based system. The technology stack revolves around an international network of servers that improve the security, performance, and reliability of products and services connected to the internet.

Born from an open-source project designed to eliminate email spam, Cloudflare today is one of the largest networks in the world and is used by an estimated 20% of the entire internet.

Stock Performance

Cloudflare’s stock performance is something to behold. From its IPO in 2019 to its 2021 high NET rallied 1,120%, partly because of its phenomenal sales growth, but also because it was caught up in the mania of the post-pandemic boom. Following that epic run, 2022 was a brutal year for Cloudflare stock, falling -83% from its peak to its 2022 lows.

Cloudflare’s manic stock returns haven’t slowed. NET has come strong out the gate in 2023, already up 25% YTD, nearly 4 times more than the broad market. It along with some of high growth tech names like Tesla (TSLA - Free Report) , Meta Platforms (META - Free Report) , and Nvidia (NVDA - Free Report)  have all had very favorable starts to the year.

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Earnings Expectations

Despite its painful returns over the last year, Cloudflare still boasts very strong sales growth. NET Q4 sales are expected to grow 42% YoY to $274 million.

As for earnings, NET is one of these technology growth companies that shows little to no profits because of reinvesting in growth. But because of the challenging macroeconomic environment NET has shift its strategy to increase net margins and show positive earnings. Q4 earnings are expected to come in at $0.04 per share, up from $0.00 Q4 FY21.

Cloudflare stock is also notoriously volatile following earnings. FY22 Q1, Q2, and Q3 earnings reports have moved the stock -27%, +27%, and -18% respectively.

Following Q3 earnings NET management provided a sales target of $5 billion annually by 2027, implying a five-year CAGR of 40%. They believe that this figure can be reached without any acquisitions or even new products, which would be an impressive feat, but in line with historical sales thus far.

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Cloud Growing Pains

While Cloudflare regularly posts epic growth rates, based on other recent earnings reports from leaders in the Cloud Industry like Alphabet (GOOGL - Free Report) , Amazon, (AMZN - Free Report) , and Microsoft (MSFT - Free Report) , it’s clear the growth rates are slowing. Google cloud growth decelerated from 38% annually to 32%, Amazon from 27% to 20%, and Microsoft CFO warned explicitly that she believes Microsoft Azure growth will continue to slow.

Furthermore, macroeconomic issues have been cited numerous times as near-term headwinds for the industry.

While the economy remains robust, the tech industry is dealing with a more challenging environment. There have been very public large-scale layoffs across the industry in recent months. Small and medium sized tech companies are experiencing similar issues outside of the spotlight as well. These businesses are a major contributor to Cloudflare’s top line.

The long-term structural slowdown in cloud services, along with short-term growth pains stalling the tech industry may be critical thorns in the side of Cloudflare’s growth projections.


With excellent sales growth and a buzzy reputation Cloudflare currently has a premium valuation of 21x price to sales ratio. This is well off its high of 116x, but certainly not a valuation anyone would consider a good value.

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Bottom Line

Cloudflare is a terrific business, and is positioned as something of an additional layer of the internet. Considering the secular trends in the digital economy, that is a good place to be. But the stock has to reflect certain economic realities, and investors can be very finicky, especially in the short term. You only have to look back a year to see how NET sentiment has shifted.

This has to make investors wonder how the near-term risks can affect NET stock again. A 25% rally YTD, historically volatile earnings responses, and growing pains in the cloud and tech may be setting up NET stock for another interesting earnings report.

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