Shares of internet security and content delivery network Cloudflare (NYSE:NET) fell 6.07% in the morning session after the yield on the benchmark 10-year Treasury bond topped 5% for the first time in over 15 years. Even with relatively decent inflation readings as of late, this could mean higher rates for longer, which would make it more costly for consumers to take out mortgages and hold credit card debt while making it more expensive for businesses to take out bank loans to fund investments and projects. As a reminder, higher rates hurt equity valuations because a company's stock price is essentially the present value of its future cash flows discounted at a discount rate. The higher the prevailing interest rate environment, the higher the discount rate. Additionally, these dynamics are more detrimental for growth stocks (like tech names) as more of the company's value is prescribed to its long-term potential.
The stock market overreacts to news, and big price drops can present good opportunities to buy high-quality stocks. Is now the time to buy Cloudflare? Access our full analysis report here, it's free.
What is the market telling us:
Cloudflare's shares are very volatile and over the last year have had 56 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 previous big move we wrote about was 23 days ago, when the company gained 5.88% on the news that the company launched Workers AI, a platform that enables developers to run AI models while leveraging the company's global server network. Cloudflare intends to make it convenient to build AI solutions on its platform by partnering with other tech platforms. It partnered with Meta to make the Llama 2 open-source large language model (LLM) available to developers building AI apps on Cloudflare's platform. LLMs are powerful tools that can be used to develop a wide range of AI applications, from chatbots to translation tools. By offering Llama 2 on its platform, Cloudflare is making it easier for developers to build AI applications without having to worry about the cost and complexity of training and deploying their own LLMs. In addition to the partnership with Meta, Cloudflare announced that it is deploying NVIDIA GPUs at the edge of its network. This will give Cloudflare customers access to the computing power they need to run AI applications at scale. Overall, these announcements are very positive for Cloudflare. The partnership with Meta and the deployment of NVIDIA GPUs at the edge of its network will make Cloudflare a more attractive platform for developers looking to build AI applications.
Cloudflare is up 39.5% since the beginning of the year, but at $60.04 per share it is still trading 17.7% below its 52-week high of $72.93 from July 2023. Investors who bought $1,000 worth of Cloudflare's shares at the IPO in September 2019 would now be looking at an investment worth $3.33 thousand.
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