What happened
Shares of Cloudflare (NET 0.33%) are losing ground this week. Before the market opened on Friday, the web-services company's share price had fallen 10.6% from the previous week's market close, according to data from S&P Global Market Intelligence.
On Monday, analysts at UBS published a report on Cloudflare that assigned a sell rating to the stock and stated that the market was overestimating the company's opportunities in artificial intelligence (AI). The stock dipped following the publication of the report and continued to move lower as the week progressed.
So what
Cloudflare is a leading provider of edge-computing services that could play an important role in powering and distributing some generative AI services around the web. But analysts at UBS believe that this benefit has already been priced into the company's stock. UBS' report put a one-year price target of $55 per share on the stock, implying roughly 13% downside based on its current valuation.
Now what
Cloudflare has seen volatile trading in recent months. The company's share price plummeted in April after the company's first-quarter report arrived with weaker-than-expected guidance. But it than saw an explosive rally in May as investors warmed back up to growth stocks, and excitement surrounding AI helped increase bullish sentiment. Even after this week's stock pullback, the company still has a highly growth-dependent valuation.
With a market capitalization of approximately $21 billion, Cloudflare trades at roughly 16 times this year's expected sales. The long-term demand outlook for the company is promising, and it stands to see positive catalysts from the rise of artificial intelligence, but its valuation profile opens the door for volatility.
In its last quarterly report, Cloudflare cut its sales target for this year to roughly $1.28 billion -- down from its previous target for sales to be between $1.33 billion and $1.34 billion. With macroeconomic pressures creating a more challenging growth environment, the stock looks risky right now. Cloudflare is a great company that could go on to deliver strong results for long-term shareholders, but investors should understand that shares could see more big swings in the near term.