What Happened:
Shares of internet security and content delivery network Cloudflare (NYSE:NET) jumped 5.2% in the afternoon session as markets roared back after an initially muted response to the Fed's rate cut, which sparked a renewed appetite for risk assets. While investors were expecting a reduction in rates from the US central bank, there was a bit of back and forth on whether the cut would be 25bps (a quarter percent) or 50bps (half a percent).
The Fed ended up slashing its policy rate by 50bps (0.5%) to 4.75%-5.00%. This marks the first rate reduction in roughly four years. As a reminder, the Fed--under Chair Jerome Powell--began raising rates to tackle inflation coming out of the COVID-19 pandemic when a confluence of supply chain disruptions, labor shortages, and stimulus spending caused inflation to run hot.
Looking forward, the Fed signaled that more cuts are possible in 2024/25. Putting it all together, the announcement and outlook provided a breath of fresh air and a clearer view of the Fed's monetary policy stance, which the market has been waiting for with bated breath. If there's anything the market doesn't like, it's uncertainty.
As a reminder, the driver of a stock's value is the sum of its future cash flows discounted back to today. The result of lower interest rates, all else equal, is higher stock valuations. This is especially true for higher-growth stocks such as those in the technology sector, where the current value depends more on cash flows many years out in the future.
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What is the market telling us:
Cloudflare’s shares are very volatile and over the last year have had 19 moves greater than 5%. In context of that, today’s move is indicating the market considers this news meaningful but not something that would fundamentally change its perception of the business.
The biggest move we wrote about over the last year was 7 months ago, when the stock gained 28.7% on the news that the company reported fourth-quarter results that topped analysts' expectations for revenue, billings, and remaining performance obligations (RPO- leading indicator of revenue growth). The strong performance benefitted from the largest new logo customer win from the US Department of Commerce, with an expected total contract value of over $30 million. In addition, the company recorded the largest customer renewal, with a total contract value of $60 million. Contributing to the strong performance, the company observed improvements in "pipeline closed rates, sales force productivity, and average deal size."
Looking ahead, Cloudflare's full-year guidance shows the company is able to maintain a strong level of growth, with sales guidance for the next quarter and the full year roughly in line with expectations. And with free cash flow now in positive territory, the growth is sustainable.
Zooming out, this was a very solid quarter, showing that the company is staying on track.
Lastly, the company announced a leadership change with Mark Anderson to replace Marc Boroditsky as President of Revenue. Before assuming the current role, Mark Anderson helped build Palo Alto Networks' sales organization and possesses vast expertise in B2B sales software leadership. He contributed to Cloudflare as a board member and expressed interest in actively participating in Cloudflare's operations after his tenure as CEO at Alteryx.
Cloudflare is up 3.5% since the beginning of the year, but at $82.23 per share it is still trading 23.8% below its 52-week high of $107.92 from February 2024. Investors who bought $1,000 worth of Cloudflare’s shares 5 years ago would now be looking at an investment worth $4,385.
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