Many high-growth tech stocks have crumbled over the past few months as inflation, rising interest rates, and other macro headwinds have sparked a rotation toward value stocks and more conservative investments.

That's why Cloudflare (NET 4.86%), which hit an all-time high of $221.64 last November, now trades at about $65 per share. Nevertheless, the stock has still more than quadrupled from its IPO price of $15 in September 2019, and it's also nearly quadrupled from its opening trade at $18 per share.

An investors checks investments on a PC and a tablet.

Image source: Getty Images.

That news might not comfort investors who chased Cloudflare's massive rally last year, but I believe this hot growth stock could still rebound and generate more multibagger gains, for four simple reasons.

1. Cloudflare is a long-term play on the evolving internet

Cloudflare's content delivery network (CDN) accelerates the delivery of digital media to websites and apps by storing their cached content on edge servers. Edge servers extend the reach of origin servers like a digital spider web, and they're usually located physically closer to the end-users.

Cloudflare also provides a domain name server (DNS) service that directs website addresses to the correct IP addresses, as well as other cybersecurity services that protect websites and their visitors from bots and distributed denial-of-service (DDoS) attacks. Most people have likely encountered Cloudflare's ubiquitous defenses -- which ask them to prove they're human by completing various tasks -- while browsing the internet.

Cloudflare serves data from 270 cities in over 100 countries, and processes an average of 35 million HTTP requests per second. It often calls itself a "water filtration" system for an evolving internet, and it expects the market's appetite for its services to grow as organizations upload more digital media while dealing with tougher cyberattacks and data breaches.

2. Cloudflare is growing like a weed

Cloudflare's revenue grew 50% in 2020 and 52% in 2021. It expects its revenue to climb another 46% to about $957 million this year. It ended the first quarter of 2022 with 154,109 paying customers, compared to 84,154 paying customers at the end of 2019.

The company's dollar-based net retention rates and gross margins (on a non-generally accepted accounting principles (non-GAAP) basis) have also consistently improved as it's gained more customers.

Period

2020

2021

Q1 2022

Revenue Growth (YOY)

50%

52%

54%

Dollar-Based Net Retention*

119%

125%

127%

Non-GAAP Gross Margin

77.6%

78.6%

78.7%

Data source: Cloudflare. YOY = Year-over-year. *Trailing 12 months.

Cloudflare is also growing faster than most of its CDN competitors. Fastly (FSLY 3.46%), which generates significantly less revenue than Cloudflare, grew its top line by 22% in 2021. Akamai (AKAM 0.95%), which is significantly larger than Cloudflare, grew its revenue just 8% last year. Akamai mainly serves much larger customers than Cloudflare.

Cloudflare's rising retention rates and expanding gross margins indicate it still has plenty of pricing power against those slower-growing industry peers.

3. Cloudflare's profitability is improving

Cloudflare isn't profitable on a GAAP basis yet, but its non-GAAP operating margins and profitability have improved significantly since its public debut.

Metric (Non-GAAP)

2020

2021

Q1 2022

Operating Margin

(7.9%)

(1.1%)

2.3%

Net Income

($33.9 million)

($15.1 million)

$3.5

Earnings per Share

($0.12)

($0.05)

$0.01

Data source: Cloudflare.

It expects its non-GAAP operating margin to rise to 1.3% (at the midpoint) for the full year, with a non-GAAP net profit of $0.03-$0.04 per share.

Cloudflare's operating and free cash flow remain deeply negative, but it was still sitting on $1.73 billion in cash, cash equivalents, and marketable securities at the end of the first quarter. That liquidity should buy it enough time to stabilize and gradually narrow its GAAP losses.

4. Cloudflare's valuation looks a lot more attractive

At its all-time high last November, Cloudflare was valued at $70 billion, or 73 times its estimated revenue for 2022. But as of this writing, it trades at about 22 times this year's sales. That price-to-sales ratio is still high, but it now looks a lot more reasonable relative to its growth rates.

Cloudflare also isn't too expensive relative to other high-growth cybersecurity companies. CrowdStrike (CRWD 3.82%), the cloud-based cybersecurity company which is expected to generate 48% sales growth this year, trades at 18 times that estimate. CrowdStrike's AI-powered rival SentinelOne (S 3.88%), which is expected to grow its top line by a whopping 81% this year, trades at 20 times that forecast.

Near-term volatility, long-term gains

Cloudflare has been a tough stock to hold over the past few months, but I believe it's still a solid long-term investment.

The stock got ahead of its valuations last year, but all of its core metrics are improving and it's well-poised to profit from the long-term evolution of the internet. Investors who tune out the near-term noise and buy some shares today will likely be rewarded with big gains over the next few years.