Cloudflare (NYSE:NET) continues to march forward with a purpose after a spectacular third quarter. Yet again, it delivered over 50% quarterly revenue growth from the prior-year period. As a result, its stock price is now trading at astronomical levels. Nevertheless, with its rock-solid business model and incredible outlook, this company is tough to ignore. Hence, investors should accumulate NET stock in the dips.
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Cloudflare’s growth story has been nothing short of impressive. It has been growing its top line rapidly with amazing net retention rates for the past several quarters. The company has focused on creating a highly scalable and robust network for its users to continue growing on both lines.
The bulls believe that its remarkable customer acquisition validates its strong value proposition. On the flip side, the bears would point out NET shares are trading at nosebleed valuations — they’re at around 100 times forward sales.
The truth is somewhere in the middle, though, which makes it imperative to examine at this point.
Cloudflare Had Stellar Third-Quarter Results
Cloudflare’s rounded off another impressive third quarter. Its revenues of $172 million rose 51% from the prior-year period. Moreover, they also rose over 13% on a sequential basis and comfortably surpassed analyst estimates by $6.65 million. Additionally, Cloudflare broke even on a Non-GAAP basis, and its results came in roughly four cents ahead of analyst estimates.
Cloudflare has done exceedingly well as a software as a service (SaaS) company, boasting industry-leading measurables. They are the leader of the pack among their peer group, with close to 77% in gross margins. For investors, the scalability of Cloudflare is extremely important as profitability has eluded from the very get-go.
The company has added 170 large customers during the third quarter. Large customers are those that provide over $100,000 in annual recurring revenues. Large customers have risen by over 126% since the first quarter. And, there was a healthy 16% sequential increase from the second to the third quarter.
Furthermore, sales aren’t slowing down anytime soon. Cloudflare’s guidance measures are predicting $184 million to $185 million for the fourth quarter, representing a 47% increase on a year-over-year basis. The company expects to break even again on a per-share basis. Cloudflare has been expanding its paying customer base with every passing quarter, especially its large customer base.
A New Collaboration, Product and Accolade
There have been a few positive developments for Cloudflare in the past couple of months. Perhaps the most noteworthy was its collaboration with the top search engine companies, including Microsoft (NASDAQ:MSFT) and Yandex (NASDAQ:YNDX).
The goal is to help companies significantly improve their search performances and reduce inefficiencies to deliver timely online experiences. According to Cloudflare’s CEO Mathew Prince: “Since the beginning, we’ve worked to help our customers to give them the speed, reliability, and security they need to do business.”
The company will also be offering an all-new email security suite that effectively integrates with its other solutions. Additionally, Cloudflare beat out its competition and achieved the designation of “Leader” from Forrester’s New Wave for Edge Development Platforms. Cloudflare outpaced industry stalwarts such as Fastly (NASDAQ:FSLY) and Microsoft in every category during the selection process.
The company’s top brass has a tremendous vision to drive the company forward in its objectives. However, NET stock’s valuation remains a concern, and it’s essentially a bet for long-term investors.
Bottom Line on NET Stock
Cloudflare never ceases to amaze as it wrapped up another stellar quarter. Revenues and earnings are up by a healthy margin, and it forecasts point to an even more solid fourth quarter.
Moreover, it has added several new large customers, which will meaningfully boost its recurring revenues. Yet, NET stock trades a lofty valuation that is too high to ignore.
Hence, it’s best to wait for short-term dips in the stock to invest in it for the foreseeable future.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.
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