On Friday, KeyBanc reduced the price target for Cloudflare Inc . (NYSE:NET) to $94 from the previous $132, while keeping an Overweight rating on the stock. The adjustment follows Cloudflare's first-quarter earnings for 2024, which surpassed expectations by 1.4% on the top line, an outcome partly attributed to the additional day in the leap year. Cloudflare's guidance for the upcoming quarter was described as cautious, reflecting a heightened awareness of macroeconomic concerns that have intensified since the previous quarter.
The company's performance included notable achievements such as a record number of large customer additions, robust growth in channel partnerships supported by significant new hires, and increased revenue from large customers. Additionally, Cloudflare saw an expansion in SASE sales and a stabilization in its Dollar-Based Net Retention Rate (DBNRR), coupled with better-than-expected gross margins without any pricing issues. However, management provided limited responses to these positive indicators when questioned, suggesting potential short-term pressures on the stock price due to its standing as one of the most expensive software stocks in the market.
Despite the near-term headwinds and the lowered price target, KeyBanc reaffirms its confidence in Cloudflare, citing the company's strong positioning to capitalize on secular trends. The firm's focus on network access, security, and the growing demand for edge/serverless computing solutions are seen as key drivers for Cloudflare's sustained valuation. The new price target of $94 is based on a 20 times multiple of Cloudflare's calendar year 2024 enterprise value to sales, which is adjusted to 0.7 times the enterprise value revenue growth rate, compared to the 0.6 times multiple for the overall software sector and 0.4 times for companies with over 20% growth.
KeyBanc highlights Cloudflare's extensive product offerings, which provide ample opportunities for sales to existing customers, and its potential to disrupt the large network and security Total Addressable Markets (TAMs) over the long term. These factors contribute to the firm's continued Overweight rating on Cloudflare's shares.
InvestingPro Insights
InvestingPro data highlights Cloudflare Inc.'s (NYSE:NET) substantial growth and market potential, despite its current lack of profitability. With a market capitalization of $25.44 billion and a significant revenue growth of 31.51% over the last twelve months as of Q1 2024, Cloudflare is demonstrating its ability to expand rapidly. The company's gross profit margin stands impressively at 76.78%, indicating strong operational efficiency. However, the P/E ratio is currently negative at -138.19, reflecting investor expectations of future profitability rather than current earnings.
Two InvestingPro Tips particularly stand out for Cloudflare: Analysts predict the company will be profitable this year, and it has an impressive gross profit margin. These insights suggest that while Cloudflare has faced challenges in achieving profitability over the last twelve months, its business model and market position could lead to a positive shift in its financial performance. Notably, the company's liquid assets exceed its short-term obligations, providing financial stability and the potential to invest in growth opportunities.
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