What happened
Shares of Cloudflare (NET -16.38%) were sharply higher on Monday, surging as much as 15.7%. By 3:33 p.m. ET today, the stock was still up 13.3%.
A broad uptrend in the overall market no doubt added fuel for its ascent, but the cloud computing company was also on the receiving end of an upgrade and some bullish commentary courtesy of a Wall Street analyst.
So what
Wells Fargo analyst Andrew Nowinski upgraded Cloudflare to overweight (buy) from equal weight (hold), while simultaneously boosting his price target to $65, up from its previous level of $62.
The analyst noted that the stock had declined significantly so far this year, dragged down by the broader market slump, and he believes the sell-off is overdone. Indeed, as of the market close on Friday, the stock had declined 65% so far this year, nearly double the decline of the Nasdaq Composite, which is down 34% during the same period. The stock's drop has resulted in a "better entry point," according to Nowinski.
Furthermore, Cloudflare will be a major beneficiary as enterprise customers begin to consolidate their accounts with fewer vendors in an effort to reduce costs and complexity, according to the analyst. Lastly, the company is expected to generate positive free cash flow in the back half of this year, an important step on the path to profitability.
Now what
The analyst is likely on to something. In its second-quarter earnings call, Cloudflare CEO Matthew Prince spoke at length about the importance of positive free cash flow, noting that its margin "showed significant improvement quarter-over-quarter, and we continue to forecast it will be positive in the second half of the year." He also said that in "this uncertain time," Cloudflare is "prioritizing being free-cash-flow positive."
Revenue grew 54% year over year, which Prince said was fueled by its increasing traction in the enterprise market.
The stock is currently selling at 13 times next year's sales, so it isn't for everyone. But for those who don't mind paying up for quality, Cloudflare is a buy.
