What happened
Shares of cybersecurity company Cloudflare (NET -1.47%) tumbled 2.1% through 11:50 a.m. ET on Monday morning.
You can thank UBS for that.
So what
Bright and early Monday morning, Swiss investment bank UBS rolled out of bed. First thing it did after doing so was downgrade Cloudflare stock to "sell."
Cloudflare's stock is selling for about $70 a share right now, but according to UBS analyst Roger Boyd, it should cost closer to $55. "Investors are pricing in too much near-term AI benefit (potentially CY24 revenues 25%-plus higher than our estimates)," warns the analyst in a note covered by StreetInsider.com today.
Eventually, UBS does expect Cloudflare to see some benefit from artificial intelligence adoption at the "distributed edge" -- in apps, for example. In the near term, however, cyber companies other than Cloudflare are likely to reap more of the benefits, so much so that Cloudflare's 70% appreciation in stock price over the past month may be jumping the gun.
Now what
I'm inclined to agree with UBS on this one.
On the one hand, analysts see strong growth prospects for Cloudflare over the long term, with analysts polled by S&P Global Market Intelligence, for example, predicting that Cloudflare's earnings (currently negative) will grow at a 37% annual compound rate over the next five years. On the other hand, though, with less than $60 million in trailing free cash flow, Cloudflare's valuation of roughly 400 times FCF seems a bit ... optimistic to me.
Were I in the market for a cyber stock myself right now, I think I'd be more inclined to focus on something like CrowdStrike (CRWD 0.14%) at 45 times free cash flow, or even Palo Alto Networks (PANW 1.37%) at 25x -- and leave Cloudflare to marinate until its profits have had a bit more time to catch up to the stock's valuation.
