Why Cloudflare (NET) Stock Is Trading Up Today

Petr Huřťák /
2023/11/29 2:07 pm EST

What Happened:

Shares of internet security and content delivery network Cloudflare (NYSE:NET) jumped 5.2% in the morning session after the macro provided a tailwind, as many tech stocks flashed green. Specifically, the yield on the 10-year Treasury fell below 4.3%, the first time it has dropped to these levels since September 2023. There seems to be increased optimism in the market that because inflation is stabilizing, interest rates could stabilize or even move lower. As a reminder, lower rates are a good for stock valuations, especially for tech companies where the market needs to discount back cash flows further out in the future. When the math is done to discount these cash flows back to today, a lower assumed discount rate leads to higher present values.

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What is the market telling us:

Cloudflare's shares are very volatile and over the last year have had 50 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 15 days ago, when the company gained 6% on the news that the latest inflation data from the Bureau of Statistics revealed that US consumer prices rose 3.2% in October, slightly better than the expected 3.3%. That's down from 3.7% in September and a peak of 9.1% in June of last year. Additionally, key categories such as food at home, electricity, and gasoline rose even less than the headline 3.2%. In fact, gas prices decreased year on year. This suggests that inflation is gradually easing, which is positive news for investors and consumers. The Federal Reserve has been raising interest rates to combat inflation, and the latest data indicates that their efforts may be paying off. However, inflation is still above the Fed's target of 2%. Regardless, the lower-than-expected inflation numbers could give the Fed more room to keep rates lower. As a reminder, lower rates are a tailwind for stock valuations, especially tech companies where the market needs to discount back cash flows further out in the future.

Cloudflare is up 83.3% since the beginning of the year. Investors who bought $1,000 worth of Cloudflare's shares at the IPO in September 2019 would now be looking at an investment worth $4,381.

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