Why Cloudflare (NET) is a promising stock despite negative earnings

Cloudflare, Inc. (NYSE: NET) is a tech firm that is yet to take full advantage of the pandemic-driven digital transformation wave. But latest data shows the web infrastructure company is on track to tap the unfolding opportunities, supported by the growing adoption of its products and steady customer wins.

Positive Outlook

After becoming a public entity in late 2019, the California-based company is yet to generate profit but reported bottom-line numbers that mostly beat the consensus estimates. That justifies the positive investor sentiment and the stable performance of the stock, though the momentum waned in recent weeks especially after the mixed fourth-quarter results. Market watchers are bullish on NET, which according to them has the potential to grow by a quarter in the next twelve months. The valuation looks just right, and the majority of experts recommend buying the stock.

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Fastly on turnaround path with focus on customers, portfolio

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A key factor that makes Cloudflare an attractive investment is the strong revenue growth in recent years, aided by growing enterprise spending on technology and customer growth. The impressive top-line has translated into improved margin performance. Also, the company has expanded its portfolio consistently and launched new products at regular intervals.

Road Ahead

After making a positive start to 2021, Coudflare is set to unveil its first-quarter numbers on Thursday. It is estimated that adjusted loss narrowed by a cent to $0.03 per share on revenues of $131 million. The company whose technology has played a key role in ensuring hassle-free COVID-19 vaccine registrations and protecting the presidential election process from cyber attacks, is not targeting a turnaround this year though it sees a marked improvement in oveall performance.

From Cloudflare’s Q4 2020 earnings conference call:

“We’re in the process of transitioning from Baidu to JD is our primary partner in China. This transition might result in temporary short-term headwinds to growth in that region. Expanding internationally remains a priority. We open three new international offices in 2020. The first in Tokyo, followed by Paris and Toronto. With our inverted go-to-market strategy we invest behind the demand we are seeing and the success of the customers we acquire helping to remove risks as we continue to expand internationally.”

Q4 Numbers Beat

In the fourth quarter, adjusted loss narrowed to $0.02 per share from $0.06 per share in the year-ago period, defying analysts’ forecast for a wider loss. The improvement was the result of a 50% growth in revenues to $125.9 million. The results also exceeded the market’s projection. The record outcome partly reflects the expansion of paid customer count to about 111,000.

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Read management/analysts’ comments on quartely reports

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Cloudflare’s stock closed the last trading session down 5%, extending the downtrend that started last week. Currently hovering around the $80-mark, the stock’s value has more than tripled since last year.