Cloudflare's (NET +6.02%) stock sank 17% after it posted its first quarter report on May 2. The cloud-based content delivery network (CDN) provider's revenue rose 30% year over year to $379 million and exceeded analysts' estimates by $5 million. Its adjusted EPS doubled to $0.16 and cleared the consensus forecast by three cents.
Those headline numbers were healthy, but Cloudflare's stock might have been due for a breather after more than doubling over the past 12 months. Let's see if its stock can bounce back and head even higher over the next 12 months.
Image source: Getty Images.
Its growth is still decelerating
Cloudflare's CDN accelerates the delivery of photos, videos, and other media for websites. It stores cached copies of that digital content on edge servers which are physically closer to a website's visitors than its original servers.
Cloudflare also shields websites from bot-based attacks, and the company claims that approach will eventually make it a "water filtration" system for the modern internet. It now processes an average of 55 million HTTP requests per second, and it serves data from 310 cities in more than 120 countries. It also recently rolled out Workers AI, a platform which enables developers to directly build and deploy AI apps on its edge networks.
Cloudflare went public in 2019 and initially grew like a weed. Its revenue soared 50% in 2020, 52% in 2021, and 49% in 2022. But in 2023, its revenue only grew 33% as the macro headwinds drove many companies to rein in their cloud spending. That slowdown spooked the bulls, and Cloudflare's stock sank from its all-time high of $217.25 in Nov. 2021 to less than $40 a year later. Its stock subsequently bounced back, but its revenue growth is still cooling off.
NYSE: NET
Key Data Points
As the following table illustrates, Cloudflare's year-over-year growth in revenue and large customers (who spend over $100,000 annually) decelerated in the first quarter of 2024. Its dollar-based net retention rate (which gauges its year-over-year revenue growth per existing customer) also dipped year over year but held steady on a sequential basis.
|
Metric |
Q1 2023 |
Q2 2023 |
Q3 2023 |
Q4 2023 |
Q1 2024 |
|---|---|---|---|---|---|
|
Revenue Growth (YOY) |
37% |
32% |
32% |
32% |
30% |
|
Large Customer Growth (YOY) |
40% |
34% |
34% |
35% |
33% |
|
Dollar-based Net Retention |
117% |
115% |
116% |
115% |
115% |
|
Adjusted Gross Margin |
77.8% |
77.7% |
78.7% |
78.9% |
79.5% |
Data source: Cloudflare. YOY = Year-over-year.
On the bright side, Cloudflare's adjusted gross margins expanded as it maintained its pricing power and economies of scale kicked in across its cloud infrastructure. By comparison, its smaller competitor Fastly only generated 14% year-over-year revenue growth with a much lower adjusted gross margin of 58.8% in the first quarter of 2024.
Its stock is still priced for perfection
During Cloudflare's first quarter conference call, CFO Thomas Seifert said the broader business environment "remains challenging to predict" with "mixed macroeconomic data points" and "heightened geopolitical uncertainty."
But despite those challenges, it reiterated its previous guidance for 27% revenue growth for the full year. It also hiked its full-year adjusted EPS forecast from 18%-20% growth to 22%-24% growth. Analysts had expected its adjusted EPS to rise 22%.
Cloudflare is still growing, but it's priced for perfection. At roughly $76 a share, it trades at 126 times this year's adjusted earnings and 16 times this year's sales. Fastly -- which expects to generate 10%-12% sales growth this year -- trades at two times that estimate. Cloudflare is also unprofitable on a generally accepted accounting principles (GAAP) basis, and those losses could hold back its stock as long as interest rates stay elevated. That's probably why Cloudflare's stock stumbled after its latest earnings beat, and why its insiders sold more shares than they bought over the past 12 months.
Where will Cloudflare's stock be in a year?
Analysts expect Cloudflare's revenue and adjusted EPS to increase 28% and 30%, respectively, in 2025. Those growth rates are stable, but they probably can't support its sky-high valuations. So as Cloudflare's growth cools off, I expect its valuations to decline and cause its stock to either stall out or dip lower over the next 12 months.
