Cloudflare Lights Up With 13% Gain After Wells Fargo Upgrade

Key Points

• Cybersecurity and network traffic company Cloudflare jumped 13% Monday in heavy trading volume after Wells Fargo upgraded the stock.
• Cloudflare's year-over-year revenue has grown between 50% and 54% in each of the past eight quarters. 
• Even if revenue in the current quarter comes in at the low end of the company's own guidance, that would still be a 45% increase. 

Cybersecurity and network traffic specialist Cloudflare NYSE: NET advanced more than 13% Monday, in trading volume nearly double the average. Shares closed at $51.72

The move followed a Wells Fargo upgrade from equal weight to overweight.

Wells Fargo also boosted its price target on Cloudflare from $62 to $65. 

The stock was among Internet infrastructure winners in 2020 and 2021, when pretty much everything tech was being snapped up by investors.

Crowdstrike NASDAQ: CRWD is another example of a cybersecurity stock that had a meteoric rise after the initial Covid-driven market pullback, but has fallen hard in the past year. 

Techs have suffered more than other stocks since late last year, as investors signaled their belief that higher inflation and interest rates would affect these companies’ sales and earnings. 

However, in his research note about Cloudflare, Wells Fargo’s Andrew Nowinski said he saw the company benefiting from increased consolidation as customers slash costs. 

If you only looked at the price performance, you might be forgiven for thinking the company’s sales and earnings had gone into a tailspin. Stock performance over various rolling timeframes is as follows: 

• 1 month: -25.59%
• 3 months: +2.44%
• Year-to-date: -65.25%
• 1 Year: -72.35%

Although that suggests terrible fundamentals, nothing could be further from the truth. 

Cloudflare has grown year-over-year revenue at very steady rates, between 50% and 54%, in each of the past eight quarters, as you can see using MarketBeat earnings data. 

The company went public in September 2019. As a startup prior to that, was not profitable, which is not unusual. Cloudflare pivoted to profitability in the third quarter of 2021, reporting earnings of $0.01 per share in each of the past four quarters. 

The company is due to report its third quarter on November 3, after the market’s close.

When it reported second-quarter results, Cloudflare issued third-quarter guidance of: 

• Total revenue of $250 to $251 million
• Non-GAAP income from operations of $0.0 to $1.0 million
• Non-GAAP net income per share of $0.00 to $0.01, utilizing weighted average common shares outstanding of approximately 342 million

If the company does earn $0.01 per share again on a non-GAAP basis, that would be flat from the year-ago quarter. If its revenue comes in at the lower end of its own guidance, that would mark an increase of 45%.

Wall Street expects Cloudflare to earn $0.03 per share on a non-GAAP basis for the full year, which means breaking even in the current quarter is factored in. Next year, that’s seen rising by 23% to $0.10 per share. 

Cloudflare’s industry categorization straddles cybersecurity and enterprise software, as its service offerings contain elements of each.

In the cybersecurity arena, a competitor is ZScaler NASDAQ: ZS, which is also relatively new to the public markets, having made its IPO debut in March 2028. It, too, notched stellar price performance in 2020 and 2021, before rolling over in December. It’s down 57.89% this year. 

Shares of ZScaler gapped up nearly 21% on September 8, after the company reported its fiscal fourth quarter. Since then, shares retreated and lost all the post-earnings gains.

But ZScaler shares got a boost Monday, along with the broader market, advancing $9.97, or 7.37%, to $145.28. 

Another Cloudflare competitor is Fastly NYSE: FSLY, which operates an edge cloud platform for processing, serving and securing customer applications.  The edge platform refers to a category of “Infrastructure as a Service” for developers.

Fastly is another young company, having gone public in May 2019. It’s been correcting since early 2021, so it missed out on last year’s big rally in tech stocks. In addition, the company is not profitable, and Wall Street expects more losses in the two years ahead.

It’s a small company, with a market capitalization of $990 million. 

If you are evaluating stocks in a particular industry, it’s OK to include small caps, as well as those currently in a correction. But even if a stock is correcting, wait until it at least begins some kind of uptrend before adding it to a watch list. There’s no reason to select one of the weaker stocks in an industry when others are showing better technicals to go along with earnings growth.