What Happened?
Shares of internet security and content delivery network Cloudflare (NYSE:NET) fell 9.1% in the morning session after the company reported third-quarter earnings and provided revenue guidance for the next quarter that missed analysts' expectations by less than 1%. Billings, a key growth indicator, also missed Wall Street's estimates, although cRPO (another topline indicator) beat and accelerated in growth rate compared to last quarter. The company noted that some large deals saw delays in closing.
Additionally, the shift towards more "pool of funds" contracts with large customers impacted the timing of revenue recognition and added noise to topline. These deals allow customers to pre-purchase credits for future use rather than locking them into stricter, longer-term contracts. It removes the friction of trying new Cloudflare products like the Workers Edge AI developer platform but also changes how revenue is accounted for, adding some variability in the near term.
Encouragingly, Cloudflare noted that the model is expected to have a long-term positive effect on sales as the model reduces sales friction by enabling customers to have more flexibility in choosing which services they need, without committing to specific products upfront.
Overall, the quarter itself was solid, but the market is focusing on the revenue guidance.
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 The Market Is Telling Us
Cloudflare’s shares are quite volatile and have had 16 moves greater than 5% over the last year. In that context, today’s move indicates 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 29 days ago when the stock gained 9.2% on the news that the company announced the appointment of Chirantan "CJ" Desai as President of Product & Engineering. This is part of efforts to prepare for its next growth phase, which includes achieving an annual recurring revenue of $5 billion.
Desai is a high-profile tech executive who has a track record for driving innovation at scale. Most recently, he served as President and Chief Operating Officer at ServiceNow (NOW) and helped scale the company from $1.5 billion to more than $10 billion in annualized revenue.
During his time at ServiceNow, he oversaw products, platform, design, engineering, customer support, cloud infrastructure operations, and customer success. Many have pointed out that he's been quoted almost as often as the CEO, especially with regard to product details and updates. Before assuming the ServiceNow COO role, Desai was Chief Product Officer.
In a blog post, he wrote about joining Cloudflare. "The world is in a very interesting moment for technological innovation: the AI landscape is uncharted and developing at an exponential rate; the urgency for enterprises to reduce tech debt and reliance on legacy applications is at an all time high; multi-cloud deployments are becoming a reality for optimal performance and global scale; and high performance connectivity is table stakes. Cloudflare finds itself in a compelling position at the intersection of these key themes."
Cloudflare is up 13.1% since the beginning of the year, but at $89.60 per share, it is still trading 17% 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 $5,558.
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