Cloudflare is the IBD Stock of the Day as the software maker rebounds from worries over Microsoft competition and a lowered fiscal 2023 revenue outlook that spooked Wall Street analysts. Cloudflare stock has gained 54% in 2023 amid a tech sector rally driven by artificial intelligence.
Second-quarter NET stock earnings are due Aug. 3. Investors may want to be cautious ahead of the earnings report. NET stock plunged 21% on April 28, the first trading session after it reported first-quarter results. One strategy around earnings would be to use call options.
Started in 2009, Cloudflare speeds up and provides security for web applications routed through its intelligent global network.
Cloudflare has ties to generative artificial intelligence startup OpenAI, the developer of ChatGPT. Further, it provides secure links to cloud services when consumers sign up to use OpenAI's ChatGPT, a conversational chatbot.
On the stock market today, Cloudflare stock dipped 1.6% to 66.54. NET stock is currently in a consolidation and trades about 7% below a traditional entry point.
But Cloudflare stock is actionable at 69.61, its intraday high on July 12 before shares sold off on Microsoft worries. Also, the entry point lines up with a trendline going back to June 2.
Cloudflare Stock: 2023 Outlook Prompts Sell-Off
The April 28 sell-off was spurred by a weak June-quarter and full-year 2023 revenue outlook. Cloudflare lowered its 2023 revenue growth outlook to 31% from 37%.
Then an investor day on May 4, in which the company discussed long-term business trends, helped soothe concerns. And NET stock clawed back.
Cloudflare has set a long-term goal of $5 billion in annual recurring revenue, or ARR, from subscription-based services. Its 2022 revenue stood at $975.2 million.
In a note to clients, Jefferies analyst Brent Thill said: "Management continues to target $5 billion of ARR organically in the next five years, noting that this target is within reach (by) just selling existing products to existing customers. We believe this implies a compound annual growth rate of 35%-plus, which we view as aspirational."
At MoffettNathanson, analyst Sterling Auty expects upside from selling existing customer more products.
"Our contention since our Cloudflare initiation is that the business is not a content delivery network but that we expect future growth to come from selling its various software bundles to existing customers," he said in a note.
One concern is that Cloudflare is losing revenue from cryptocurrency customers that are struggling.
A Player In Generative AI
Meanwhile, Microsoft continues to broaden its cybersecurity product offerings, pressuring NET stock, Zscaler and other companies.
Cloudflare stock dipped 5.5% on July 12. But some analysts say the sell-off was overdone. One of those was Morgan Stanley analyst Hamza Fodderwala, who says most companies do not want to rely too heavily on Microsoft.
"Enterprises want to avoid vendor lock-in and will mitigate risk via multiple vendors, separating the security from the infrastructure provider," Fodderwala said.
Most analysts expect generative artificial intelligence to be a long-term growth driver since most Cloudflare revenue comes from other customers.
In addition, UBS analyst Roger Boyd in June initiated coverage of NET stock with a sell rating.
"While we expect Cloudflare's distributed edge can play a role in the generative AI ecosystem longer-term, we think near-term expectations are being conflated with the opportunities of companies more directly tied to centralized compute," said Boyd.
He added: "In addition, while we are optimistic on opportunities in app security, edge compute and network security longer-term, we still see a challenging near-term setup due to potential go-to-market disruption, cloud optimizations and a tough macro."
Cloudflare Stock: Technical Ratings
Meanwhile, NET stock holds a best-possible IBD Composite Rating of 99, according to IBD Stock Checkup. Also, it's among AI stocks to watch.
IBD's Composite Rating combines five separate proprietary ratings into one easy-to-use rating. Also, the best growth stocks have a Composite Rating of 90 or better.
Further, Cloudflare stock has an Accumulation/Distribution Rating of B-plus. That rating analyzes price and volume changes in a stock over the past 13 weeks of trading. Its current rating indicates more funds are buying than selling.
The rating, on an A+ to E scale, measures institutional buying and selling in a stock. A+ signifies heavy institutional buying; E means heavy selling. Further, think of the C grade as neutral.
Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on 5G wireless, artificial intelligence, cybersecurity and cloud computing.
