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Cloudflare Stock Is Soaring: Is It a Buy?

By Daniel Sparks – Oct 19, 2021 at 6:35AM

Key Points

  • Momentum with large customers is fueling strong top-line growth for the edge network software specialist.
  • Cloudflare added a record 140 large customers in its second quarter.
  • The tech company reports its third-quarter results early next month.

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Shares have already risen nearly 60% this month.

Just when the stock of edge network software specialist Cloudflare (NET -6.10%) seemed like it couldn't go any higher in the near term, it did. The growth stock soared almost 8% on Monday, giving shares a 57% gain month to date. Investors cheered as the company announced a partnership with Microsoft's Bing (MSFT -2.36%) and other search engines to make search results more timely. 

The stock's sharp move higher on Monday adds to a bullish run that has been largely driven by the company's strong financial results. But the momentum will be put to the test early next month, when Cloudflare reports its third-quarter results. Without spectacular financial results for the period, shares could falter.

Following the stock's huge run-up, and ahead of Cloudflare's third-quarter earnings report, here's a closer look at the stock.

A person looking at charts on a laptop.

Image source: Getty Images.

Rapid growth and a big partnership

Fueling Cloudflare stock's 138% gain this year has been its stellar financial results. First-quarter 2021 revenue increased 51% year over year, an acceleration from 50% growth in the prior quarter. After that, second-quarter revenue increased 53%, coming in at $152 million. This was well beyond management's guidance for revenue to be between $145.5 million and $146.5 million. 

Cloudflare has also had impressive momentum with large customers -- customers the company defines as contributing $100,000 in annualized sales to its business. The edge computing specialist added 120 large customers in the first quarter of 2021. In addition, it crossed an important milestone in the period: Large customers represented 50% of revenue for the first time. This momentum persisted into the second quarter, with the company adding a record 140 large customers, putting total large customers at 1,088.

The company's new collaboration with Microsoft's Bing, Yandex (YNDX -6.79%), and other search engines improves Cloudflare's value proposition to large organizations. As part of the collaboration, it brought to market a feature that will notify search engines immediately when content is created, updated, or deleted, helping them more efficiently crawl the internet. "Now, all Cloudflare customers can ensure users see the most up-to-date version of their content, all with a single click," the company said in a press release on Monday. Of course, rapid search results bolster the value of its network to businesses of all sizes, not just large customers.

What about Cloudflare stock's valuation?

If you're having trouble wrapping your mind around Cloudflare stock's valuation, you're not alone. With a market capitalization of about $57 billion, the stock's valuation has become quite speculative. The company's trailing-12-month revenue is just $531 million. Furthermore, its bottom line was a loss of more than $100 million over the same period.

For the stock to live up to its sky-high valuation, Cloudflare will need to grow its top line at high rates for years. In addition, its expenses as a percentage of revenue will need to improve significantly.

While the business is exciting, investors should be cautious about betting on this stock at this price point.

Cloudflare is scheduled to report its third-quarter results after market close on Thursday, Nov. 4.

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Daniel Sparks has no position in any of the stocks mentioned. His clients may own shares of the companies mentioned. The Motley Fool owns shares of and recommends Cloudflare, Inc., Microsoft, and Yandex. The Motley Fool has a disclosure policy.

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