Shares of Cloudflare (NET 1.44%) have been down in the dumps this year along with other growth stocks, dropping 64% year to date. However, that steep decline has made it a relative bargain that investors can consider buying now before it goes on a bull run.
After all, Cloudflare is growing rapidly and it serves a market that's built for impressive growth both in the short run and the long run. At the same time, signs of cooling inflation in the U.S. and the Federal Reserve's inclination toward slowing the pace of interest rate hikes could give equities a nice shot in the arm. It could ultimately send stocks on a bull run in 2023.
Let's look at some of the reasons why investors who are seeking growth stocks should consider buying Cloudflare right now.
Cloudflare should sustain its impressive growth
Cloudflare released its third-quarter 2022 results on Nov. 3 and reported an impressive 47% year-over-year increase in revenue to $254 million. The company, which is known for making internet connections not only fast but also reliable and secure, surpassed $1 billion in annualized revenue for the first time last quarter thanks to a sharp spike in its customer base and spending.
Cloudflare has now set its sights on hitting $5 billion in annualized revenue in the next five years in an organic manner. It is not surprising to see why the company has set an ambitious target of growing its top line fivefold in five years.
First, Cloudflare is only scratching the surface of a massive end-market opportunity. The company sees its total addressable market (TAM) hitting $135 billion by 2024, which would be four times its TAM in 2019 when it went public. The growing adoption of zero-trust security services, data storage services, and network services will drive the massive growth in Cloudflare's end market.
Second, Cloudflare is pulling the right strings to make the most of the huge TAM. This is evident from the rapid growth in Cloudflare's base of large customers -- consisting of customers spending more than $100,000 on its offerings in a year -- which has increased roughly 300% since it went public to 1,537 at the end of the first quarter of 2022. The rapid growth in Cloudflare's large customer base has continued as the year has progressed, with the company reporting 1,908 large customers in Q3, an increase of 51% over the prior year.
The healthy customer spending on Cloudflare's solutions is also evident from the solid dollar-based net retention rate that the company has been reporting quarter after quarter. This metric measures the company's "ability to retain and expand recurring revenue from existing customers" by comparing the annualized revenue from paying customers in a quarter to the annualized revenue from the same set of customers in the prior-year period.
Last quarter, Cloudflare reported a dollar-based net retention rate of 124%. A reading of more than 100% means that it was able to expand its business from existing customers. The company's large addressable market and the robust growth in both the customer count and spending indicate why its top-line growth is expected to remain healthy.
Cloudflare has guided for $974.5 million in revenue this year, which would be an increase of 48% over 2021. Furthermore, the chart below shows the top line is estimated to head higher in the next couple of years.
NET Revenue Estimates for Current Fiscal Year data by YCharts
Investors are getting a good deal on the stock right now
The stock market hasn't rewarded Cloudflare's growth in 2022, but that could change in 2023 thanks to cooling inflation and a potential bull market. That's especially true considering that the company is expected to sustain its momentum. That's why investors looking to buy a beaten-down growth stock may want to buy it before it's too late.
Cloudflare's severe pullback has brought the stock's price-to-sales ratio down to 16. That's rich considering the S&P 500 has a sales multiple of 2.4, but investors shouldn't forget that the company is growing rapidly and has solid growth potential ahead of it. That's why the expensive valuation seems justified.
So, growth-oriented investors with a risk appetite may want to buy Cloudflare stock right away, as it has the potential to jump higher in the new year.
