There's Long-Term Potential in Cloudflare Despite Near-Term Macroeconomic Fluctuations, Analyst Says

Cloudflare, Inc NET stock is trading higher Monday. RBC Capital analyst Matthew Hedberg maintained an Outperform rating on the stock and raised the price target from $54 to $71.

The analyst will look for a slight upside to estimates as the focus will be on results vs. the previously reduced outlook, the revised GTM strategy, and the level of potential conservatism around last quarter's lowered CY/23 outlook. 

While Hedberg remains mindful of the near-term choppy macro and longer sales cycles, he thinks the longer-term thematic story remains intact. 

Against stabilizing macros trends, the analyst expects a slight upside to results as the company continues to work through GTM changes noted last quarter. For some perspective, Q1/23 and Q4/22 revenue was essentially in-line, while Q2/22 represented the previous quarter of 3%+ revenue outperformance. 

Most of the focus is likely around macro trends and CY/23 estimates following last quarter's reduced outlook to 31.5% vs 37% previously. 

Regarding macros, Cloudflare has typically had an early read relative to others, and that could be reflective of the more mixed Q1 off-quarter earnings with deteriorating macros noted by several companies vs. the more stable trends called out with Q1 on-quarter earnings. 

As for the outlook, while Q2/23 consensus estimates seem reasonable at $16M in Q/Q revenue additions, consensus assumes a 2H/23 ramp with $23M in Q3/23 revenue additions and $27 million in Q4/24. 

Additionally, the company is coming off a mid-quarter investor day that he thinks did an excellent job providing more context around the previously announced sales force changes and a better sense of the core platform strategy. 

Following the 33% move lower following Q1/23 results, NET is +65% from the May 4 low vs. the S&P +13% as sentiment has improved along with the growth software space. 

The price target boost reflects peer group multiple expansion as he continues to like the company's long-term opportunity. 

The analyst seeks Q2/23 revenue/EPS vs. consensus at $306 million/$0.07, +30% revenue growth or $16 million in q/q revenue add vs $15 million from Q4/22 to Q1/23. 

The Q3/23 revenue/EPS guidance compares to consensus at $329 million/$0.09, +30% revenue growth. The CY/23 revenue/EPS guidance stack against the consensus at $1,282 million/$0.34, +31% revenue growth.

Price Action: NET shares traded higher by 2.44% at $68.56 on the last check Monday.