Insights

Why Cloudflare Stock Is Skyrocketing Today

What happened

Shares of network security and content delivery expert Cloudflare (NYSE: NET) are soaring in the clouds today. Lifted by a robust earnings report with a side of bullish revenue guidance, the stock posted a peak gain of 27.2% just before 11 a.m. ET.

So what

Cloudflare’s second-quarter sales surged 54% above the year-ago result, landing at $234.5 million. Your average analyst would have settled for approximately $227 million. On the bottom line, adjusted earnings rose to a breakeven reading, compared to a $0.02 loss per share in the comparable period of 2021. This performance was right in line with the Street’s expectations. The company also added 212 large customers during the quarter. It now has 1,749 clients in this category. Cloudflare defines a large customer as a contract with at least $100,000 in annual revenue.

Looking ahead, Cloudflare’s management set up the goalposts for full-year revenue at roughly $970 million. The current analyst consensus for this figure stands at just $958 million.

Now what

Those all-important large customers accounted for 60% of Cloudflare’s total revenue in the second quarter, up from 53% in the year-ago report. This increase reflects the company’s successful efforts to chase down client leads in this lucrative customer category.

Even after today’s sudden jump, Cloudflare’s stock is still 55% lower year to date and 67% below November’s all-time highs. Shares aren’t cheap given the company’s minuscule earnings and negative free cash flow, but Cloudflare’s sales are growing like gangbusters.

Sometimes you get what you pay for. In this case, Cloudflare investors get their hands on a high-octane growth stock in a massive network security market. You have to believe that the earnings and cash flows will come later, after building the largest possible client base with the current low-profit but high-growth strategy.

Anders Bylund has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Cloudflare, Inc. The Motley Fool has a disclosure policy.

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