Categories Analysis, Technology

Cloudflare (NET) bets on customer growth, innovation to reward investors

The growth of Cloudflare, Inc. (NYSE: NET) from a provider of security tools to a cloud-based enterprise security company was quite impressive. Earlier this month, the stock rose to a record high, continuing the steady uptick seen since the company’s Wall Street debut about six months ago.

emerging stock buy or sell small-cap profile

Cloudflare added a record number of clients in the most recent quarter and entered new enterprise security markets with additional offerings. The consistent customer growth is a testimony to the effective marketing plan, wherein the company initially served small firms and gradually expanded its services to bigger paying clients.

Also see: Where’s Cloudflare stock headed after grand IPO?

After delivering strong results for its first fiscal quarter after going public, the company is all set to scale new heights in the fast-growing industry that has significant growth potential. The fact that analysts have hiked their estimate for Cloudflare’s full-year revenue, after the fourth-quarter report, shows that there is a high level of optimism. The management is also looking for a 36% growth in full-year revenues. The consensus rating on the stock is moderate buy.

Turnaround

Investors will be looking for updates on the company’s strategy to become profitable. Cloudflare, which is yet to generate profit, has been innovating its portfolio. The main reason for negative earnings is costs associated with investments in business expansion, including launch of new services and promotional activities. Meanwhile, experts are of the view that the company is unlikely to come out the red in the near future, which could be a concern for shareholders.

Cash flow

On the positive side, Cloudflare is in a comfortable position as far as cash flow is concerned. That, combined with the upbeat sales outlook for fiscal 2020, points to an improvement in performance in the second half. Having pulled back from the recent peak, amid the widespread selloff triggered by the COVID-19 crisis, Cloudflare’s stock is moderately priced right now.

Related: After a tough year, the road ahead for Cloudera looks bleak

It is likely that investors would take inspiration from the stock’s uptrend in recent weeks, while being aware of the risks. Cloudflare shares gained about 17% since going public in September last year.

Q4 Outcome

In the fourth quarter, the bottom-line remained in the negative territory, on an adjusted basis, but loss narrowed to $0.06 per share from $0.18 per share in the prior year. The improvement reflected a 51% growth in revenues to $84 million. The results also came in above the market’s prediction.

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