What happened
Cloudflare (NET 1.44%) stock is getting crushed early in Friday's trading. The company's share price was down roughly 20.8% at 10 a.m. ET.
Cloudflare published its first-quarter earnings results after the market closed yesterday, delivering sales and earnings for the period that came in ahead of the market's expectations. The company posted non-GAAP (adjusted) earnings of $0.01 on revenue of $212.2 million, while the average analyst estimate had called for a break-even quarter on sales of $205.6 million. However, the company's Q1 free cash flow disappointed investors, and its forward guidance seemingly underwhelmed the market at a time when growth stocks are already under pressure.
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So what
Hot on the heels of the 50-basis-point increase for interest rates and generally hawkish comments from the Federal Reserve's recent meeting, the market is balking at Cloudflare's Q1 report despite performance generally looking pretty good. Revenue climbed 53.7% year over year, and customers already using its services increased their spending 27% on average compared to the prior-year period. For comparison, Cloudflare grew sales 52% annually last year, so revenue growth in this year's first quarter actually accelerated from that already impressive figure.
On the other hand, the company's free cash outflow of $64.4 million was worse than the market anticipated and came in significantly higher than the $2.2 million outflow from the prior-year quarter. The Q1 release was followed by a series of downward price-target revisions from analysts that also appear to be adding to bearish sentiment.
Now what
For the second quarter, Cloudflare is guiding for sales to come in between $226.5 million and $227.5 million, while the average analyst estimate had targeted sales of $217.76 million. Meanwhile, the company's target for adjusted earnings performance between breakeven and a loss of $0.01 per share came in a bit worse than the market's target for a breakeven quarter.
For the full-year period, management expects sales to be between $955 million and $959 million, a range that was also significantly better than the $932.44 million in sales called for by the average analyst target. Adjusted earnings for the year are expected to be between $0.03 and $0.04, once again topping the average analyst estimate -- which had called for adjusted per-share earnings of $0.03.
Cloudflare provides content-delivery network (CDN) services, protection against distributed-denial-of-service (DDoS) attacks, and a variety of other services that are designed to keep internet applications online and performing well. The company has category-leading service offerings and continues to look like a strong business, but the market is currently selling out of stocks that trade at growth-dependent valuations.
After recent pullbacks, Cloudflare now has a market capitalization of roughly $20 billion and trades at approximately 21 times this year's expected sales. As business and communication increasingly takes place through online channels, there's a favorable long-term demand outlook for the company's services, but Cloudflare's forward-looking valuation means the stock could see more turbulence if investor appetite for growth stocks continues to wane.
