Cloudflare results spark analysts reset: 25% upside ahead

The Cloudflare Inc. NYSE: NET Q4 results and guidance sparked an analyst reset that has the cybersecurity stock up 25% in after-hours trading and on track for another 25% gain in 2024. The results confirm a solid growth trajectory, and margins are widening, leading to accelerated earnings growth and higher stock price targets from the analysts. 

The move will not likely be a straight line; there is a high probability that profit-taking will hinder the rally, but this rally has legs, and the movement has just begun.

Cloudflare exceeds targets, raises guidance

Cloudflare had a robust quarter, highlighted by strength in every metric. The company reported $362.5 million in net revenue for a gain of 32% that outpaced the MarketBeat.com consensus estimate by 270 basis points. There was notable strength in new customer wins and client size. The company reports its largest client win in Q4 and record renewals with momentum in large clients. 

Margin news is favorable. The company capitalized on revenue leverage by controlling costs and improving the gross and operating margins. The gross margin improved by 170 bps, 150 bps adjusted, with a 490 basis point improvement in the adjusted operating margin. 

This led to record operating cash flow and free cash flow, up 50% YOY and 14% of revenue. Adjusted earnings came in at 15 cents or up 150% YOY and 2,500 bps better than expected, with margin strength forecasted to persist. 

The guidance has two things going for it: caution and outperformance relative to the analysts' forecasts. Caution is seen on the top line with the Q1 forecast above consensus and the FY in alignment. The company shows clear momentum and should be able to build on its success sequentially throughout the year. Analysts are likely to raise their FY targets as the year progresses. 

You can see outperformance in the Q1 and FY earnings, which are expected to exceed the pre-release consensus figure and may also be cautious. Regardless, the company expects to sustain a high 20% growth this year. 

Cloudflare sends signal to market; equity is growing

Cloudflare's cash position fell over the year due in part to asset purchases and debt repayments, but the net result of operations is positive. The company's current and total assets are up, liabilities are relatively flat, and equity is rising. 

Shareholder equity improved by 22% and is expected to continue rising, given the outlook for cash flow. Long-term debt is primarily long-term senior notes, which amount to 1.7X equity and is down 10% year-over-year (YOY). 

Analysts are on the move now that results and guidance are in. At least three significant price target increases have been posted since the release, including the new high target of $135. That is set by Needham, which has the stock pegged at Outperform. The consensus target continues to lag the market but is led higher by the revisions, and more are expected. As it is, the consensus is near $75 and is flat YOY but rising sharply compared to last month and quarter. 

The technical outlook: Cloudflare melts up to critical resistance

The price action in Cloudflare stock is vigorous following the Q4 release and has the market up another 25% on top of the 8% gain posted the day before the release. 

The move confirms a reversal in the market but has it trading at a critical resistance point. That point is near $115, a significant point of past support and resistance. If the market can move above $115, it should be able to sustain a rally in the year's first half. In that scenario, a minimum target is a $75 gain on top of the post-release pop. If the market can't get above $115, it may return to firmer support levels near $90.