Why Cloudflare Stock Is Very Dangerous And Priced For Perfection

Seeking Alpha2021-09-07

Summary Cloudflare is a pure-play on the growth of the internet. The stock has jumped nearly 100% over the last 6 months alone. Cloudflare continues to generate strong growth numbers with gains on ...

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Comments

notlhw
2021-09-07
notlhw
Cloudflare is going to $200.
- 0680huat:
  Agree
MRRICH
2021-09-07
MRRICH
Nice
CPCat
2021-09-07
CPCat
Indeed crazy high multiple. Probably will cool down...
- koolgal:
  ??

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In spite of already trading at what I viewed to be a very rich valuation, the stock continues to rise rapidly. I fear that this is a situation commonly seen in today’s market: investors are buying stocks of high growth companies at any price. If the story is appealing, and the stock price keeps going up, it is easy to convince oneself to keep buying even if the valuation no longer makes sense. The current stock price is setting up new shareholders for a high likelihood of downside surprise.\nNET Stock Price\nJust 6 months ago, I initiated coverage on NET and pointed out a rich valuation that still allowed for 9% annual returns over the next decade. I also mentioned that investors might want to consider selling a covered call in order to improve the near term returns. My outlook proved too conservative, as the stock proceeded to return 93% from that day:\n\nWhy Is NET Stock Up?\nThis kind of stock price performance is phenomenal. But what drove the strong returns? 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It appears that most of the upside has been driven by multiple expansion, as NET is now trading at a blistering 76x trailing revenues.\nIs Cloudflare Stock A Buy, Sell, or Hold?\nWhen stock price performance is driven by multiple expansion, one mustn’t ignore the fact that this is inherently unsustainable, as the stock should not continue getting more and more expensive. One could make the argument that multiple expansion is reasonable when the stock trades cheaply, but I’m hard pressed to call NET cheap even prior to this 93% run up. NET is now trading at 63.6x forward sales:\nSeeking Alpha\nI note that Wall Street consensus estimates for 2021 appear to already reflect NET’s new guidance of $632 million in full-year revenues. Is NET attractively valued at 63.6x forward sales and a 33.7% expected 2022 growth rate? No, and let me explain why. 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NET would be trading at 12x 2028 revenues and at 30x adjusted earnings. One could make the argument that NET should trade at 50x adjusted earnings given the 25% growth rate - equating to 66% upside. But 66% upside over 7 years represents only 7.5% annual returns, and that is after using profitability estimates that are double of management’s own guidance and growth assumptions that are arguably far too aggressive. While I can appreciate the investment thesis of NET being a pure-play on the growth of the internet, the current stock price is pricing in significant downside potential. I wouldn’t be surprised if the stock experiences extreme volatility over the coming quarters as investors realize that growth will not accelerate as much as expected. I am not bearish the stock because the long term growth will likely allow for positive returns eventually, but my neutral rating should be interpreted as aggressively recommending to allocate capital elsewhere.","kind":"news","is_publish_news":true,"is_publish_highlight":true,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[{"id":817777232,"gmtCreate":1630994224826,"gmtModify":1676530437534,"author":{"id":"3575616038841569","authorId":"3575616038841569","name":"notlhw","avatar":"https://static.tigerbbs.com/eab27b706f5ecdd467cfa9022d07be00","vip":1,"crmLevel":9,"crmLevelSwitch":0,"idStr":"3575616038841569","authorIdStr":"3575616038841569"},"htmlText":"Cloudflare is going to $200.&nbsp;","listText":"Cloudflare is going to $200.&nbsp;","text":"Cloudflare is going to $200.","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":2,"commentSize":1,"repostSize":0,"link":"https://ttm.financial/post/817777232","repostId":1100864302,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"comments":[{"id":5778992,"gmtCreate":1631002448518,"gmtModify":1663233505429,"authorId":3578465657605658,"author":{"id":3578465657605658,"idStr":"3578465657605658","authorId":3578465657605658,"name":"0680huat","avatar":"https://static.tigerbbs.com/674aa720475e31276b1e3c6cfc5cc9b0","vip":1,"crmLevel":1,"crmLevelSwitch":0,"individualDisplayBadges":[]},"repliedAuthorId":0,"objectId":817777232,"type":1,"supId":0,"prevId":0,"content":"Agree","text":"Agree","html":"Agree"}],"langContent":"EN"},{"id":817777039,"gmtCreate":1630994193221,"gmtModify":1676530437512,"author":{"id":"3582792409142285","authorId":"3582792409142285","name":"MRRICH","avatar":"https://static.tigerbbs.com/35ba916bd4fa84b460ff38eee7294c37","vip":1,"crmLevel":8,"crmLevelSwitch":0,"idStr":"3582792409142285","authorIdStr":"3582792409142285"},"htmlText":"Nice","listText":"Nice","text":"Nice","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":1,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/817777039","repostId":1100864302,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":817772980,"gmtCreate":1630993913240,"gmtModify":1676530437448,"author":{"id":"3582520228861009","authorId":"3582520228861009","name":"CPCat","avatar":"https://static.tigerbbs.com/3bafaf3d39abfb78a4bedf785310721a","vip":1,"crmLevel":2,"crmLevelSwitch":1,"idStr":"3582520228861009","authorIdStr":"3582520228861009"},"htmlText":"Indeed crazy high multiple. Probably will cool down...","listText":"Indeed crazy high multiple. Probably will cool down...","text":"Indeed crazy high multiple. Probably will cool down...","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":2,"commentSize":1,"repostSize":0,"link":"https://ttm.financial/post/817772980","repostId":1100864302,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"comments":[{"id":5849549,"gmtCreate":1631506458082,"gmtModify":1663233804551,"authorId":3559581955535845,"author":{"id":3559581955535845,"idStr":"3559581955535845","authorId":3559581955535845,"name":"koolgal","avatar":"https://static.tigerbbs.com/c05274d88ffc0434623e57350c52c70a","vip":2,"currentWearingBadge":{"badgeId":"c4ee29b388ff41cc8462b3b7ea00d1e2-1","templateUuid":"c4ee29b388ff41cc8462b3b7ea00d1e2","name":"Monthly Top Contributor","description":"Top 3 Contributors with the most and best Editor's Picks every month","bigImgUrl":"https://static.tigerbbs.com/b0cad6192443c33dca826a001250fbd4","smallImgUrl":"https://static.tigerbbs.com/5ccd98c646815ce7610b0df338e060cc","redirectLinkEnabled":1,"redirectLink":"https://ttm.financial/TW/9000980585","hasAllocated":1,"isWearing":1,"stampPosition":0,"hasStamp":0,"allocationCount":1,"allocatedDate":"2022.04.02","individualDisplayEnabled":0,"individualDisplaySort":0,"categoryType":2003},"crmLevel":6,"crmLevelSwitch":1,"individualDisplayBadges":[{"badgeId":"9427a906234c4b18a82ec3d7730b7fa8-1","templateUuid":"9427a906234c4b18a82ec3d7730b7fa8","name":"Star Contributor","description":"Have published 3 or more picked posts, and have published at least one picked post and participated in comments within 30 days","bigImgUrl":"https://community-static.tradeup.com/news/1866dcf97a73be1c330f85862546aedc","smallImgUrl":"https://community-static.tradeup.com/news/4f5c5fa8e2c7683bb5a7fce8753ee456","redirectLinkEnabled":1,"redirectLink":"https://ttm.financial/activity/market/2023/star-contributors/","hasAllocated":1,"isWearing":0,"stampPosition":0,"hasStamp":0,"allocationCount":1,"allocatedDate":"2024.12.22","individualDisplayEnabled":1,"backgroundColor":{"dark":"#675a37","tint":"#f9ebc2"},"fontColor":{"dark":"#ffffff","tint":"#ab7a0e"},"individualDisplaySort":0,"categoryType":2007}]},"repliedAuthorId":0,"objectId":817772980,"type":1,"supId":0,"prevId":0,"content":"??","text":"??","html":"??"}],"langContent":"EN"}],"isCommentEnd":false,"newsSizeData":{"likeSize":29,"commentSize":3,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/1100864302"}