What happened
Although investors should never make their stock buy or sell decisions purely on the move of an analyst, a change in pundit outlook can often impact a company. So it was on Monday, with content delivery network (CDN) services provider Cloudflare (NET 1.44%); on a prognosticator's recommendation downgrade, investors traded out of the shares. They closed down by almost 2.5% on the day.
So what
The analyst, who is now officially more bearish on Cloudflare's future, is Guggenheim's John DiFucci. Well before market open, he changed his recommendation on the specialty tech stock to sell from the previous neutral. He also set a new price target of $50 per share.
In a new research note, DiFucci expressed concern with the company's inflated share price, and with what he believes is overly rosy guidance.
Referring to the crucial metric of annual recurring revenue (ARR), the pundit wrote, "We believe the modest 2Q23 beat will not likely carry over to the second half, where a steep hill of new ARR needs to be climbed just to meet expectations (informed by guidance) -- unless of course the macro backdrop (described as a "grind" by management) significantly improves."
Now what
DiFucci also believes that 2024 estimates for Cloudflare's performance could be too lofty. He wrote that in order for the company to hit its long-term goal of $5 billion in annual revenue for 2027, it would have to post 50% growth in new ARR of roughly 50% every quarter after this year. He does not feel this is realistic.
