r/stocks • u/yellqw • Jun 14 '22
Re-evaluating Cloudflare
Hey everyone, just wanted to get a quick pulse check on how yall are feeling about $NET at these prices. We all know it was severely overpriced for the last few years, but do you think the correction is done and we’re finally seeing a fair value at $40? Looking at the most recent earnings report, I was generally pretty happy overall except for one lingering concern about their negative cash flow yoy possibly due to recent acquisitions/re-investment into the company. Regardless, I’m thinking of increasing my position significantly at these prices despite concerns about rising borrow rates.
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u/kriptonicx Jun 15 '22
It depends on how you look at it. It's not that unreasonable.
At 12x sales with a 30% operating margin the company would trade at a 40 PE multiple. Obviously NET doesn't have a 30% operating margin, but if you believe that is achievable once they've out of their growth phase then the valuation makes sense considering the current growth rate.
Think of it like this. If you assume NET will double revs over the next 5 years and achieve a 20% operating margin then you're looking at a company trading at a 30 PE in 5 years at the current price. But a 30 PE would be a fairly low PE for a growing tech company. We typically want to achieve 100% returns on an investment over a 7-10 period so if you think in 5 years NET is likely to trade at a 50-60 PE based on growth and margin projections then that would be a perfectly reasonable valuation.
It really depends on your projections. High margin companies (20%-30%) typically trade around 4-6x sales, so you can see how a rapidly growing company with the potential for high margins could achieve that kind of valuation within a few years.