Why Cloudflare shares fell this week

What happened

Cloudy (NYSE:NET) The stock’s terrible year got even worse this week. Shares of the cloud services business have fallen 16.1% overall this week, according to data provided by S&P Global Market Intelligence.

The stock’s decline comes as the market revalues growth stocks like Cloudflare below. As the Federal Reserve tightens liquidity, stocks whose price is largely based on higher expected long-term cash flows are losing popularity, compressing their valuation multiples. Although this has been a trend for much of the year, it continued to be a market driver this week.

So what

Capturing a tough week across the market, the S&P500 fell 3% this week, and heavy tech Nasdaq Compound down 3.8%.

Cloudflare’s $55.75 share price is a far cry from its 52-week high of over $220, showing how much of a shift in market sentiment towards stocks that are priced largely based on their earnings futures can impact stocks like Cloudflare. The company is a perfect example of multiple expansion risk stock types; even though it still holds a market capitalization of $18 billion, it is still not profitable on a generally accepted accounting principles (GAAP) basis or even on a cash flow basis.

Image source: Getty Images.

Now what

Of course, Cloudflare stock investors are betting that the company’s rapid revenue growth will eventually pay off in economies of scale, driving substantial profits in the future. But it’s a market where investors are looking for more certainty, which makes Cloudflare stock less attractive.

Nevertheless, it may be wise for investors to widen their time horizon even if the market shortens theirs. A contrarian view can sometimes help investors identify good long-term opportunities at a time when shares of certain companies may be trading at discounted prices amid excessive fear and intense selling.

To Cloudflare’s credit, its Q1 revenue grew rapidly, growing 54% year-over-year. The company also added a record 14,000 paying customers during the quarter, bringing the total number of customers to more than 154,000. Additionally, Cloudflare said customers spending more than $1 million a year on its services have increased spending at an average rate of 72% year over year.

“Key to our success and expanding our customer base is innovating at a relentless pace and pursuing interest in consolidating behind a single vendor capable of powering multiple large-scale network services,” explained the Cloudflare CEO Matthew Prince in the company’s first quarter earnings release.

With momentum like this, Cloudflare is demonstrating truly disruptive execution and market share gains. Investors should perhaps take the time to take a closer look at Cloudflare’s underlying business to see if the stock is starting to look attractive after its significant decline.

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Daniel Sparks has no position in the stocks mentioned. Its clients may hold shares in the companies mentioned. The Motley Fool holds positions and recommends Cloudflare, Inc. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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