A strong quarterly earnings report pushed Cloudflare (NET 1.44%) shares 24.6% higher last month, according to data provided by S&P Global Market Intelligence. The cybersecurity leader posted better-than-expected results and issued optimistic guidance.
Investors loved Cloudflare's quarterly report
Cloudflare stock climbed immediately following its Feb. 8 earnings report. The company exceeded analyst expectations and issued encouraging forecasts for the year ahead. It notched an impressive 32% revenue growth last quarter and issued guidance calling for 27% expansion next year. That's welcome news, suggesting that the company's growth rate has stabilized after decelerating significantly in 2022.
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Investors also cheered Cloudflare's efforts on the profitability front. The company reported an adjusted net profit margin of 11%, allowing it to eclipse $40 million in quarterly free cash flow. Its 10% adjusted operating margin guidance indicates that the top-line expansion should translate to higher cash flows. At some point in the corporate maturation process, the strategic focus shifts away from expansion at all costs in favor of efficiency and profitability. Cloudflare is still in the early stages of this shift, but its ability to quickly deliver impressive cash flows when growth was threatened is impressive.
NET Revenue (Quarterly) data by YCharts
That performance speaks to quality management, a strong product offering, and pricing power. Cloudflare also boasted 115% net dollar retention, which is a measurement of how much active its customers from one year ago are paying today. The strength of this metric indicates that the company is keeping its customers happy and doing a good job of expanding those relationships. That's typically achieved with product enhancements and effective account management practices. These are all bullish signs for the future, and they remove significant risk from the story.
Cloudflare trades at a premium valuation
Investors are well aware of all that good news, resulting in an expensive valuation for the stock. Its forward price-to-earnings ratio is around 170, and its price-to-sales ratio is over 25. That makes it relatively expensive, even in comparison to most of its high-profile cybersecurity peers.
NET PS Ratio data by YCharts
The company's stellar performance metrics and a strong growth rate justify that premium valuation in the eyes of many investors who are bullish about long-term demand for cybersecurity software and services. However this does shift the risk-reward balance into less attractive territory for investors, with lots of future success already assumed in this valuation. Be prepared for volatility here.
