The S&P 500 (SNPINDEX: ^GSPC) has rebounded more than 20% from its bear market low reached last October, so some investors have already hailed the beginning of a new bull market. But other investors are waiting for the index to hit a new record high. By that definition, the S&P 500 is 7% below where it will finally enter bull market territory.
In any case, shares of Cloudflare (NET 1.09%) currently trade 70% below their all-time high, but the cloud computing stock could soar as the market moves higher in the coming years. Indeed, the S&P 500 returned an average of 186% during bull markets dating back to 1970, and many stocks will appreciate significantly during the next one.
Here's why Cloudflare is a worthwhile investment right now.
Cloudflare is a recognized leader in several cloud verticals
Cloudflare operates the fastest cloud network on the market, and it unifies a broad range of application, network, and security services that protect and accelerate corporate infrastructure across private data centers and public clouds. The company also provides compute and storage services through its developer platform that let businesses build and deploy software and webpages directly on its performant network.
Cloudflare has a leadership position in many of those categories, including content delivery network software, web application protection, zero trust network access, and edge development platforms. That success is a product of superior performance, broad platform capabilities, and a material data advantage.
I've already discussed the speed and product breadth Cloudflare brings to the table, but its platform also powers about 20% of the web in some capacity and every request creates actionable intelligence regarding performance issues and security threats across the internet. Cloudflare uses that data to more effectively route web traffic and block attacks for customers.
Business spending remained muted in the second quarter amid uncertain economic conditions, but Cloudflare still reported solid financial results. Revenue increased 32% to $308 million and cash flow from operating activities soared 68% to $64 million. Those results were driven by a 15% jump in customers and a 115% retention rate, which means the average customer spent 15% more than they did one year ago.
Investors have cause to think Cloudflare can maintain or even accelerate its growth trajectory in the future, especially as economic conditions improve and businesses lean more aggressively into IT spending.
Cloudflare is capitalizing on its massive market opportunity
Cloudflare says its addressable market will reach $204 billion by 2026, driven higher by the perpetual push for operational efficiency and digital transformation. But the company has particularly large opportunities in two product categories: developer tools like Cloudflare Workers and R2 Storage; and its secure access service edge (SASE) platform, Cloudflare One.
The number of applications on the Workers development platform increased 250% in the first half of the year, and several generative artificial intelligence (AI) start-ups are choosing Cloudflare R2 Storage, a more cost-efficient alternative to Amazon S3 Standard. But the most bullish update was the earnings-call commentary from CEO Matthew Price, who said Cloudflare is "uniquely positioned to win the [AI] inference market" given its position as the fastest global cloud network.
Meanwhile, IT consultancy Gartner says enterprise adoption of SASE platforms like Cloudflare One will approach 80% in 2025, up from 20% in 2021, as businesses seek to unify internet access, cloud services, and private applications on a common network behind consistent security policies. Cloudflare should be a major beneficiary of that tailwind. The company is a recognized leader in zero trust network access, and Prince recently said "we really like our win rates" against first-generation vendors like Zscaler and Palo Alto Networks.
Cloudflare stock is worth buying at its current valuation
Shares of Cloudflare currently trade at 18.4 times sales. That valuation is not cheap, but it is a bargain compared to the three-year average of 41 times sales and it looks reasonable in context.
Specifically, Cloudflare has a strong presence in a big market, and management says its revenue run rate will reach $5 billion by the third quarter of 2027. The implied annual revenue growth of 39% makes its current valuation appear quite reasonable. Investors should bear in mind that management may be wrong, but those who pass on this growth stock today may come to regret the decision in the future.