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.
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.
