Key points
- Cloudflare had a solid quarter and led the market higher, sparking a meltdown in price action.
- Analysts are raising their targets and see the stock advancing at least 25%.
- A move towards the new high target would confirm a significant pivot in the market and could add $75 or more to the post-release price action.
- 5 stocks we like better than Cloudflare
THE Cloudflare Inc. NYSE: NET The fourth-quarter results and guidance sparked an analyst review that sees the cybersecurity stock up 25% in after-hours trading and on track for another 25% gain in 2024. The results confirm a solid growth trajectory and margins are widening, leading to accelerated earnings growth and higher stock price targets from analysts.
The move probably won’t be a straight line; there is a high probability that profit taking will hinder the rally, but this rally has legs and the movement has just begun.
Cloudflare exceeds goals and improves guidelines
Cloudflare had a robust quarter, highlighted by the strength of every metric. The company posted net revenue of $362.5 million, a 32% gain that beat MarketBeat.com’s consensus estimate by 270 basis points. There was significant strength in new customer acquisition and customer size. Company reports largest customer acquisition in Q4 and sees renewals with momentum in large accounts.
Margin news is favorable. The company leveraged leverage by controlling costs and improving gross and operating margins. Gross margin improved 170 bps, 150 bps adjusted, with a 490 bps improvement in adjusted operating margin.
This led to record operating cash flow and free cash flow, up 50% year over year and 14% in revenue. Adjusted earnings came in at 15 cents or up 150% year over year and 2,500 basis points better than expected, with margin strength expected to persist.
The guidance focuses on two aspects: caution and outperformance compared to analysts’ forecasts. There is caution in the top line with first quarter forecasts above consensus and the fiscal year in line. The company shows clear momentum and should be able to consolidate its success sequentially throughout the year. Analysts are likely to raise their targets for the fiscal year later in the year.
You can see outperformance in Q1 and fiscal year earnings, which are expected to beat the pre-release consensus figure and may even be cautious. Regardless, the company expects to sustain high growth of 20% this year.
Cloudflare sends a signal to the market; equity is growing
Cloudflare’s cash position has declined over the year due in part to asset purchases and debt repayments, but the net result of operations is positive. The company’s current and total assets are increasing, liabilities are relatively stable, and equity is increasing.
Net worth improved by 22% and is expected to continue growing, given the cash flow outlook. Long-term debt consists primarily of long-term senior notes, which amount to 1.7 times equity and are down 10% year-over-year (YOY).
Analysts are on the move now that the results and guidance are in. At least three significant price target increases have been posted since release, including the new high target of $135. This is established by Needham, who has the title pegged to Outperform. The consensus target continues to lag the market, but is driven higher by revisions and more are expected. As it stands, the consensus is near $75 and is stable on a year-over-year basis, but up sharply from the previous month and quarter.
The technical perspective: Cloudflare melts to critical resistance
Cloudflare stock price action is strong following the Q4 release and has driven the market up another 25% on top of the 8% gain recorded the day before the release.
The move confirms a market reversal, but has it trading at a critical point of resistance. That point is near $115, a significant point of past support and resistance. If the market can break above $115, it should be able to sustain a rally in the first half of the year. In this scenario, a minimum target is $75 earnings plus post-release pop. If the market fails to move above $115, it could move back to firmer support levels around $90.
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