Please ensure Javascript is enabled for purposes of website accessibility

Why Cloudflare Stock Plummeted Today

By Keith Noonan – Jan 4, 2022 at 4:40PM

Key Points

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The high-flying cybersecurity stock is stumbling early in 2022.

What happened

Shares of Cloudflare (NET -3.18%) sank 8.9% on Tuesday. Rather than any business-specific news, it was momentum for the broader market driving the pullback.

Growth-dependent stocks were hit hard in today's session due to surging cases of the coronavirus omicron variant, and concerns about the macroeconomic backdrop in 2022 are likely also factoring into the pullback. The tech-heavy Nasdaq Composite index ended the day's trading session down roughly 1.3%, and Cloudflare ranked among the day's biggest large-cap technology losers. 

A lock icon on a circuit board.

Image source: Getty Images.

So what

With the spread of the omicron variant accelerating, the U.S. has recently recorded a record number of coronavirus cases. The Federal Reserve has also recently indicated that it will significantly cut back on bond purchases in the near future and that it will potentially raise interest rates three times this year, which generally points to a less-favorable backdrop for growth stocks and could lead to more volatility in the near term. 

Cloudflare posted stellar gains across 2021, but its share price ran into bearish pressures late in the year, and it's off to a rough start in 2022. While the stock is still up about 51% over the last year, it also now trades down approximately 48% from the lifetime high of $221.64 that it hit in November.

Now what

Cloudflare protects content delivery networks against distributed-denial-of-services attacks, and provides other web performance-enhancing features. With business increasingly moving to digital channels, the company has been posting stellar growth.

It notched year-over-year sales increases of 51%, 53%, and 51% over its last three reported quarters, respectively, and it's been adding new customers at an impressive clip and boosting spending by those already paying for its services. Cloudflare has also been registering very strong gross margins, which signals that the business could wind up posting substantial profits and big earnings growth down the line. 

Over the long term, Cloudflare still has a very favorable outlook. The company is a leader in cybersecurity service categories that seem virtually certain to see strong demand trends through the next decade and beyond. But the stock's growth-dependent valuation sets the stage for volatility if investors generally become more risk averse. 

Cloudflare now has a market capitalization of roughly $37 billion and trades at roughly 42 times this year's expected earnings. 

Keith Noonan owns Cloudflare, Inc. The Motley Fool owns and recommends Cloudflare, Inc. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.