What happened
Shares of Cloudflare (NET +1.83%) were trading sharply higher on Friday, climbing as much as 8.2%. As of 12:47 p.m. ET, the stock was still up 8%.
Overall, the market was higher, which no doubt provided fuel for its ascent, but the cloud computing company was also on the receiving end of an upgrade and some less bearish commentary courtesy of a Wall Street analyst.
NYSE: NET
Key Data Points
So what
Guggenheim analyst John DiFucci upgraded Cloudflare to neutral (hold) from sell, while simultaneously assigning a price target of $7. That suggests the stock still has downside of as much as 82% compared to Thursday's closing price. This analyst is the most bearish among his Wall Street peers, as the stock has a consensus price target of $55, so his view should be considered in that context.
The upgrade comes on the heels of the company's disappointing financial report and precipitous fall late last week, as the stock plunged more than 20% in a single day.
DiFucci opined that unreasonably high expectations, the soft economy, and a rich valuation resulted in a perfect storm when Cloudflare reported slowing growth and issued tepid guidance. As a result of a more modest multiple and more achievable forecast, DiFucci believes the "risk/reward as more balanced at the current stock price," according to The Fly.
Now what
The analyst may well be on to something. While his near-term price target seems extreme, his view that the combination of high expectations and lofty valuation conspired to take down the stock is on the money.
Even after its significant reset of late last week, Cloudflare is still selling for 14 times sales, when a reasonable price-to-sales ratio is between 1 and 2. While investors may be willing to pay a hefty premium for a company that's firing on all cylinders, the dramatic slowdown in revenue growth and weak forecast made shareholders reconsider just how much of a premium they were willing to pay.
The stock could have further to fall, particularly given the current economic backdrop. That said, for those with a cast-iron constitution and a three- to five-year outlook, Cloudflare stock is beginning to look much more appealing.
