Cloudflare (NET  ) reported Q1 earnings that beat expectations on the top and bottom line. It also reported strong margins and issued guidance that was above expectations. However, shares were down by more than 15%, as investors are in a 'sell and ask questions later' mindset when it comes to growth stocks.

Cloudflare was one of the best performers during the pandemic as it climbed more than 1,300% from its bottom in March 2020 to its high in November 2021. Since then, the stock is down by nearly 75% due to the selloff in tech and growth stocks.

Inside the Numbers

In Q1, Cloudflare reported a loss of $0.13 per share which was the same as last year's Q1 and more than analysts' expectations of a break-even quarter. Revenue came in above expectations at $212 million vs expectations of $206 million.

This was a 54% improvement from last year.

Shares were lower despite Cloudflare's guidance coming in above expectations. It sees Q2 revenue between $226.5 million and $227.5 million for the second quarter, above expectations of $217.9 million. For the full year, it sees EPS of $0.04 and revenue of $957 million which is slightly above analysts' expectations.

The company also attained records in terms of 14,000 new paying customers and 72% growth in customers with over $1 million a year in spending. This has been maybe the most treacherous earnings season since the Great Recession or the dot-com crash. And, it explains why Cloudflare shares were weak despite the company's strong earnings report and guidance.

During the Great Recession, earnings reports were fraught with risk, especially for financial companies, revealing their exposure to MBS. Stocks could see big losses based on these disclosures.

Today, we are seeing the unwinding of extreme valuations in growth and tech stocks. And, it seems that many of the most extreme moves are happening after earnings reports which are indicating a much slower trajectory than what investors were forecasting a year ago.

So, Cloudflare's issue is its $21 billion valuations with less than $1 billion in revenue. This valuation could be justified in low inflation, low-rate world but not so much in high inflation, high growth world. Therefore, the stock will certainly have some big bounces, but lower prices are likely in store.