Cloudflare Stock: Insiders Are Still Checking Out (NYSE:NET)

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“California is a place where they shoot too many pictures and not enough actors.” -Walter Winchell

Few stocks demonstrate how fast the markets have gone into ‘risk off’ mode starting late last year than Cloudflare Inc. (NYSE:NET). The stock came public in late 2019 and rocketed up right through the height of the pandemic. However, since the end of 2021, the shares have been in free fall. Despite an approximate 80% fall from the peak, insiders are still selling shares, even as the stock is far below many analyst firm price targets. Will the equity rebound, or are insiders signaling yet more pain to come? An analysis follows below.

NET Stock Chart

Seeking Alpha

Company Overview:

Cloudflare is based in San Francisco. The company offers a variety of security based services to businesses. These include an integrated cloud-based security solution to secure a range of combination of platforms, including public cloud, private cloud, on-premise, software-as-a-service applications. The firm also provides performance solutions, which include content delivery and intelligent routing, as well as content, mobile, and image optimization solutions. The company’s vision is delivering a programmable network to developers and coders that allows them to not think about the underlying process.

Cloudflare - Global Platform

May Company Presentation

The stock trades just north of $40.00 a share currently with a market capitalization just north of $14 billion.

Cloudflare Cloud Platform

May Company Presentation

First Quarter Results:

On May 5th, Cloudflare announced first quarter results. It posted a non-GAAP profit of a penny a share as revenues rose more than 53% on a year-over-year basis to just over $212 million. Both top and bottom line numbers slightly beat expectations.

The company hit an all-time record of 14,000 paying customers in the quarter. This brought the overall total to just north of 154,000. Cloudflare also recorded a record dollar-based net retention rate of 127%, up 400 basis points year-over-year.

Cloudflare Large Customer growth

May Company Presentation

Leadership also provided the following guidance for FY2022.

  • Total revenue of $955 to $959 million vs. $932.44M consensus
  • Non-GAAP income from operations of $10 to $14 million
  • Non-GAAP net income per share of $0.03 to $0.04.

Cloudflare FY22 Guidance

May Company Presentation

Analyst Commentary & Balance Sheet:

There has been a noticeable shift in analyst firm sentiment downward since first quarter numbers were reported. Seven analyst firms, including Jefferies and Stifel Nicolaus, have reissued Neutral or Hold ratings since then. Price targets proffered range from $55 to $90 a share. Several analyst firms have also reiterated Buy or Outperform ratings, including Needham and RBC Capital. However, several of these contained significant downward price target revisions. Price targets proffered by the bulls are in the $100 to $150 a share range.

Just over five percent of the outstanding shares in the equity are currently held short. One consistent part of this story is numerous insiders are consistent and frequent sellers of the stock, and have been since November of last year. They sell every month and have sold tens of millions of dollars worth of shares so far this. For many officers, sales seem to be a substantial amount of their holdings. They have sold nearly $10 million in aggregate so far in June, as we are only halfway through the month. There has been no insider buying in the stock since the company came public.

Cloudflare Balance Sheet

May Company Presentation

Cloudflare’s balance sheet is in good shape. The company ended the first quarter with just over $1.7 billion in cash and marketable securities on the balance sheet after posting a GAAP net loss of just over $40 million for the quarter.

Verdict:

The current analyst consensus has the company posting a slight profit this year as revenues rise just over 45% to nearly $960 million. Sales growth is projected to subside to just over 35% in FY2023, when Cloudflare is expected to make a dime a share in profit.

Cloudflare Historical Revenue Growth

May Company Presentation

Cloudflare is still delivering impressive sales growth, even as the growth rate is slowing as the base grows larger. That said, even with the huge plunge in the shares, the stock sells for approximately 15 times forward sales. In ways of comparison, industry heavyweight Palo Alto Networks (PANW) is seeing 30% revenue growth in FY2022 and is nicely profitable, and goes for roughly 8.5 times forward sales.

The company should turn cash flow positive in the second half of this year, but profit will be minimal for FY2022 and FY2023 at the very least. Given this, it is easy to see why insiders are still selling even at these depressed levels.

“California is a fine place to live – if you happen to be an orange.” -Fred Allen

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