Why Cloudflare Stock Took a Dive on Monday
Key Points
One Wall Street analyst thinks expectations are too high ahead of Cloudflare's financial report.
The highly publicized PHP vulnerability illustrates the value of the company's services.
Shares of Cloudflare (NYSE:NET) slumped out of the gate to start the week, falling as much as 6%. As of 1:44 p.m. ET, the stock was still down 3.5%.
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The catalyst that sent the edge computing and cybersecurity specialist lower was a bearish note from a Wall Street analyst.
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Great expectations
Jefferies analyst Joe Gallo maintained a hold rating on Cloudflare but lowered his price target to $320, down from $350. That still represents potential upside of 14% compared to Friday's closing price. The analyst suggests he expects higher demand for the company's cloud services in the current quarter but believes the bar may be set too high.
Analysts' consensus estimates call for revenue of $739 million, representing year-over-year growth of 32%, and adjusted earnings per share (EPS) of $0.34, up 26%. For context, Cloudflare's forecast calls for revenue in a range of $736 million and $737 million and adjusted EPS of $0.34, so Wall Street is predicting higher sales growth than management's outlook.
That's no coincidence. Cloudflare has an impressive track record of beating expectations, surpassing Wall Street's consensus estimates in each of the past four quarters. That said, investors are fickle, so there's no way to know for sure how the stock will react to any given quarter of financial results. We'll know for sure when Cloudflare reports after the market close on Thursday.
Taking a step back, however, suggests the future is bright. Just last month, Cloudflare deployed protective measures against the highly publicized PHP website vulnerability ahead of the public disclosure. PHP is used by roughly 70% of all websites, and this security vulnerability could have allowed hackers to access servers, steal customer data, and disrupt services, according to Cloudflare. Reports suggest there were thousands of hacking attempts leading up to the revelation and millions thereafter.
This helps to illustrate the importance of Cloudflare's cloud and cybersecurity services and why investors should focus beyond the company's next financial report.
Danny Vena, CPA has positions in Cloudflare. The Motley Fool has positions in and recommends Cloudflare. The Motley Fool has a disclosure policy.