The past year was terrible for Cloudflare (NET 1.86%) investors as shares of the cloud services company lost 43% of their value. The drop came amid the broader stock market sell-off which was triggered by surging inflation and rising interest rates. Still, there has been a sharp turnaround in the stock's fortunes in 2023 and the price is up 45% since the start of the year.
This terrific 2023 rally is also attributable, in part, to the broader market's reaction to cooling inflation and a potential pause in the interest rate hikes by the Federal Reserve. But as Cloudflare stock is still trading significantly below its 52-week high, should investors buy it in anticipation of more upside? Let's find out.
Cloudflare stock is expensive, but that's half the story
Cloudflare's price-to-sales ratio of 21.6 means that the stock is trading at a significantly rich valuation when compared to the S&P 500's sales multiple of 2.4. It is worth noting that the stock was trading at a lower sales multiple of 16 at the end of last year before its latest rally started. So, investors who missed buying Cloudflare toward the end of 2022 based on the company's terrific growth prospects will now have to pay a higher valuation to buy it.
Doing so may not be a bad idea, especially for investors with a higher risk appetite. That's because Cloudflare is relatively cheaper than it was a year ago.
NET PS Ratio data by YCharts.
As the chart above shows, it was trading at over 50 times sales a year ago. With analysts expecting Cloudflare to deliver almost 70% upside over the next year, investors looking for a growth stock can still consider buying this cloud play for a few simple reasons.
Here's why the stock remains a buy
Cloudflare is targeting a massive addressable market that it believes will grow from $115 billion in 2022 to $135 billion in 2024, driven by the growing demand for the multiple services that the company offers. The company caters to multiple markets such as content delivery networks (CDNs), distributed denial-of-service (DDoS) attack prevention, intrusion and detection prevention, firewall, and virtual private network (VPN) along with network and storage services.
It is also worth noting that Cloudflare holds a strong market share in fast-growing niches. For instance, the company reportedly controls 47% of the CDN market that's expected to grow at an annual rate of 23% through 2030, according to Grand View Research. Additionally, Cloudflare sees the opportunity for incremental growth in areas such as the Internet of Things and 5G as well. These lucrative end markets explain why the company's revenue has been increasing at an eye-popping pace over the years.
NET Revenue (TTM) data by YCharts.
Cloudflare reported 49% revenue growth in 2022 to $975 million. It also posted a non-GAAP net income of $0.13 per share last year as compared to a loss of $0.05 per share in 2021. The healthy growth in Cloudflare's customer base and the company's ability to drive incremental spending from customers have been key to its eye-popping growth.
For example, the number of customers who spent at least $100,000 on Cloudflare's products in the trailing 12 months jumped to 2,042 last year from 1,416 in 2021. What's more, the number of customers who spent at least $500,000 in the trailing 12 months on the company's offerings increased a whopping 83% in 2022 to 222.
Not surprisingly, Cloudflare is expected to sustain solid top-line growth in the future.
NET Revenue Estimates for Current Fiscal Year data by YCharts.
Additionally, its earnings are expected to grow at an annual rate of 47% over the next five years. So, it won't be surprising to see Cloudflare deliver the terrific gains that analysts are expecting from it. That's why long-term investors looking to buy a growth stock now may want to act quickly before Cloudflare flies higher and becomes more expensive.
