What happened

Shares of content-delivery network (CDN) Cloudflare (NET -0.23%) were up 17% in January, according to data provided by S&P Global Market Intelligence. And February is shaping up to be even better so far. As of Feb. 3, before the market opened, Cloudflare stock is up 40% year to date, soaring past the 8.9% return of the S&P 500.

So what

Cloudflare's CDN is a way of routing internet traffic to speed things up. However, beyond network services, Cloudflare's technology can also be applied to cybersecurity. And in this realm, the company made progress in January, which might partially explain its gains during the month.

On Jan. 13, Cloudflare announced that it won a $7.2 million contract from the Cybersecurity and Infrastructure Security Agency (CISA) to provide domain name services to .gov sites. On one hand, the size of this contract is small. After all, Cloudflare generated more than $700 million in revenue during the first three quarters of 2022. But on the other, this contract demonstrates Cloudflare's growing ability to win business from the highest levels of government, where security is crucial. 

This contract with CISA comes after Cloudflare achieved U.S. Federal Risk and Authorization Management Program's (FedRAMP) Moderate Status in December. When this was announced, co-founder and CEO Matthew Prince said, "With this FedRAMP milestone, Cloudflare can serve more agencies, as well as the companies that sell to them."

Further developing its cybersecurity abilities, Cloudflare announced a partnership with Microsoft on Jan. 12. The idea is that Cloudflare and Microsoft's cloud service Azure share mutual customers who need cloud-based cybersecurity tools. And the partnership between the two companies will make it easy to deploy Cloudflare's tools. 

Now what

Cloudflare is scheduled to report financial results for the fourth quarter of 2022 on Feb. 9 after the stock market closes. And Wall Street isn't very optimistic going into the report. During January, analysts Joel Fishbein of Truist, James Fish of Piper Sandler, and John DiFucci of Guggenheim all downgraded Cloudflare stock. And according to The Fly, all three cited valuation concerns.

It doesn't appear that Wall Street's valuation warnings have fallen on deaf ears, either. Short interest in Cloudflare stock -- or investors betting that the stock will go down -- is high, at nearly 10% of the float. 

This brings in another complicated element to Cloudflare stock. Over the past couple of weeks, investors are increasingly eager to speculate on companies that have high short interest, including Cloudflare, which has caused their prices to surge.

Cloudflare is a strong company, as evidenced by the trust the U.S. federal government is willing to place in it. However, it does look like short-term issues like valuation and short interest are weighty on investors' minds. And that could make this stock more volatile in the near term, which is something for shareholders to keep in mind.