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Cloudflare Is Carrying A Lot Of Optimism Heading Into Earnings

Aug. 01, 2021 10:20 AM ETCloudflare, Inc. (NET) Stock21 Comments


  • Cloudflare heads into Q2 earnings next week on the back of reaching a new ATH last week.
  • We think quite a bit of optimism may have been baked into its current price against this regular earnings crusher.
  • We discuss the salient points and key metrics that investors need to monitor for Q2 release closely.
  • While we retain our high conviction level in Cloudflare's business model, we think new investors should wait for a better entry point as its valuation looks stretched.

Exterior view of Cloudflare headquarters
Sundry Photography/iStock Editorial via Getty Images

Investment Thesis

In our previous article, we took the opportunity to remind investors of Cloudflare's (NYSE:NET) tremendous scalability potential. Also, we explained the misconception of its widely perceived Content Delivery Network (CDN) features.

This article was written by

JR Research profile picture

JR Research is a seasoned investor with a background in economics. He focuses on identifying 3 main things - leading growth companies, emerging market trends, and secular growth opportunities. His approach combines price action with fundamentals investing.

He runs the investing group Ultimate Growth Investing which specializes in identifying high-potential opportunities across various sectors. The group is designed for investors seeking to capitalize on emerging, high-growth opportunities, and investors looking for sustainable growth opportunities at a reasonable price.

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Analyst’s Disclosure: I/we have a beneficial long position in the shares of NET either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (21)

Is Cloudflare ever going to go sub 100? Price to sales going to be over 100 soon
JR Research profile picture
@Peterso21 We wouldn't mind if it breaks that ceiling either.
50 P/S with 50% growth? Unbelievable!
JR Research profile picture
@StockHarvestor These days it does get a little heady.
good article- i agree- i think its need a 20-30% haircut and even if they beat, i think it is met with "sell the news" reaction
JR Research profile picture
@Golfsohard We think it's setting itself up well for a "sell-the-news" trigger.
This stock is way too high. I hope the same things does not happen to the stock price as has happened to FASTLY. The stock was 140 a few months ago and is now around $50. My thinking is that if FASTLY is down by almost 2/3, I wonder what would happen t Cloudfare if they don't beat or miss.
JR Research profile picture
@Xandi Fastly's headwinds were quite different from Cloudflare. Cloudflare's model is much more scalable and less affected by CDN usage patterns. Fastly is a pure-play CDN that is based on usage among its customers, especially the media and entertainment industry.
Yuppp profile picture
Good article, I’ve watched NET for the last couple of months going up and up….. and up even more, $50 in just over 2 months. With skittish a market currently, their earnings report better crush it on every conceivable metric or I would expect a significant haircut. Actually there will probably be a sell off even with a 100% perfect quarter.
JR Research profile picture
@Yuppp Thank you! We think so too.
Good article, thanks for the insight.

While I know that no one is clairvoyant, can you think of any significant operational, technology or competitive restrictions, constraints or threats, that you haven’t already mentioned, that could impair NET’s Gross Margin/move to positive FCF over the next several years?

JR Research profile picture
Cloudflare has strong pricing power for what they serve customers, and we think it's likely to continue. However, the most likely near-term impact would still be the semiconductor supply chain, where the chip costs may temporarily eat into its gross margins.

However, in terms of a strategic impact that would significantly affect its pricing power, we think it would still be AWS and, to a lesser extent, Azure. Cloudflare has had a tense relationship with AWS for a while, and it will probably intensify moving forward. Matthew Prince has also acknowledged recently that Amazon keeps him up at night as he thinks.

"Amazon's ambitions are boundless. I think that we go into everything we do with the assumption that whether it's Amazon or Microsoft or Google or any of the sort of hyper-scale public cloud, there's no line of code that we can write that is so clever that it gives us a long-term durable advantage." (seekingalpha.com/...)

So it would be good to keep watching how Workers perform. Cloudflare doesn't break out Workers' contributions, so keeping a close watch during the earnings call may be useful.
@JR Research Thanks again.
To sum it up: "Just stay long NET, you won't regret it." I am.
@hksche2000 you will bend out if stock price keep falling over 2 month
If u compare NET forward revenue growth of 2022 /2023 with SNOW, and u will find out SNOW traded at more compelling level although its 2021 ps is 70 which is 15% higher than NET . But SNOW 's further rev growth is far higher and its 2022 /2023 ps are 42 and 27 while NET 's 2022/2023 PS are 44 and 36.

Net 's fair price should be around sub 90
JR Research profile picture
@tigerinmotion Thank you for your insights. However, SNOW operates a different business model, so I find it less meaningful to compare its valuations with NET, especially when SNOW operates a usage-based revenue model, in contrast with NET's subscriptions model...so really quite different to make a direct comparison on valuations.
@JR Research yeah, they are different model, but i just throw out the rev growth data for compariation, there is lots of hi growth monsters out there and I dont know how to swallowthis 60 times 2021 ps for this edge computing business which its further growth will decelrate to 30% and less
Can't argue over the valuation and I certainly wouldn't be adding here but the comparison with AMZN and FB seems a bit odd. Social media use and onlline retail is bound to face tougher comps this year but the Cloud is still very much in its infancy.
JR Research profile picture
@Fundamental Trader Thanks for your comment. In fact, the experience from social media and e-commerce has not been similar so far. While AMZN and FB experienced tougher comps, SNAP, TWTR, SHOP all reported a blockbuster Q2.

The comparison was drawn not so much for the business model similarities but to heighten situational awareness on the need to tamper some optimism if some investors were too excited to add NET at this level.
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