Cloudflare (Nasdaq: NET) jumped 20% higher following its strong third-quarter results. The company also raised guidance above analysts' expectations. Cloudflare, currently has tremendous amounts of momentum, due to a couple of factors.
The increase in remote work is leading to increased demand for its cloud-based network security tools. It, recently, launched a new product - Cloudflare One - that is a comprehensive solution for workplace security needs in terms of remote access. Investors are enthused by the potential of this new product given the company's ability to offer more higher-value services to users.
Inside the Numbers
Sometimes, investors get excited about a stock's story and potential, bid up shares, but then it comes crashing down when the company disappoints investors by not meeting their lofty expectations. This is not the case for Cloudflare as the company delivered on three key metrics.
First, it topped analysts' expectations for sales and earnings. Analysts were looking for a loss of $0.05 per share and revenue of $103 million. Cloudflare reported a loss of $0.02 per share and revenue of $114 million.
Second, Cloudflare delivered guidance that was above expectations. Analysts were expecting a loss between $0.05 and $0.06 per share with revenue of $112.4 million. Instead, Cloudflare guided for a loss between $0.02 and $0.03 per share and revenue of $118.4 million.
Third, Cloudflare had revenue growth of 54%. This was better than last year's 47% revenue growth and signifies a return to acceleration for sales. As noted in the past, periods of accelerating sales are often when a stock price delivers its most exceptional returns, especially for stocks with 77% gross margins like Cloudflare.
Stock Price Outlook
Cloudflare is on its way to becoming one of the premier cybersecurity companies. And, this is reflected in its stock's performance. Since IPO'ing late last year, it mainly traded between $15 and $25 until March of this year. Like many cloud-related stocks, it started rallying and making new highs during the Spring and Summer as remote work became the norm.
Unlike many stocks whose momentum has cooled, Cloudflare is a secular growth story and a cyclical growth story. While the cyclical catalyst fades, the secular story is intact. This was made clear with the recent introduction of Cloudflare One which is a potential inflection point for the stock, as it seeks to become a full-scale security provider to companies.