Because this AI stock takes a lick but keeps ticking away

Cloudflare (NET) is the IBD stock of the day as the software maker recovers from worries Microsoft (MSFT) and tight 2023 tax revenue prospects that have Wall Street analysts spooked. Cloudflare stock gained 54% in 2023 amid an AI-led tech sector rally.

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Second quarter NET stock earnings are expected on August 3rd. Investors may want to be cautious ahead of the earnings report. NET stock plunged 21% on April 28, the first trading session after reporting first-quarter results. One earnings strategy would be to use call options.

Launched in 2009, Cloudflare accelerates and provides security for web applications routed across its intelligent global network.

Cloudflare has ties to generative AI startup OpenAI, the developer of ChatGPT. It also provides secure links to cloud services when consumers sign up to use OpenAI’s ChatGPT, a conversational chatbot.

In today’s stock market, Cloudflare stock fell 1.6% to 66.54. NET stock is currently in a consolidation phase and is trading about 7% below a traditional entry point.

But Cloudflare stock is usable at 69.61, its intraday high on July 12 before the stock was sold on Microsoft concerns. Also, the entry point lines up with a trend line that dates back to June 2nd.

Cloudflare Stocks: Outlook 2023 calls for a fire sale

The April 28 sell-off was spurred by weak revenue outlooks for the June quarter and full year 2023. Cloudflare lowered its 2023 revenue growth forecast to 31% from 37%.

So an investor day on May 4, where the company discussed long-term corporate trends, helped allay concerns. And NET stock bounced back.

Cloudflare has set a long-term goal of $5 billion in annual recurring revenue, or ARR, from subscription-based services. Its 2022 revenue was $975.2 million.

In a note to clients, Jefferies analyst Brent Thill said, “Management continues to organically aim for $5 billion in ARR over the next five years, noting that this goal is achievable by simply (selling) existing products to clients.” We believe this implies a 35% higher compound annual growth rate, which we consider ambitious.”

At MoffettNathanson, analyst Sterling Auty expects a benefit from selling more products to existing customers.

“Our thesis since Cloudflare’s inception is that the company is not a content delivery network, but that we expect future growth to come from selling its various software packages to existing customers,” he said in a statement. .

One concern is that Cloudflare is losing revenue from struggling cryptocurrency customers.

A player in generative AI

Meanwhile, Microsoft continues to expand its offering of cybersecurity products, putting pressure on NET stock, Zscaler and other companies.

Shares of Cloudflare fell 5.5% on July 12. But some analysts say the sell-off was too much. One such analyst was Morgan Stanley analyst Hamza Fodderwala, who says most companies don’t want to rely too much on Microsoft.

“Enterprises want to avoid vendor lock-in and will mitigate risk across multiple vendors, separating the security from the infrastructure vendor,” Fodderwala said.

Most analysts expect generative AI to be a long-term growth driver as most of Cloudflare’s revenue comes from other customers.

In addition, UBS analyst Roger Boyd started covering NET stocks with a sell rating in June.

“While we expect Cloudflare’s distributed edge to play a role in the Generative AI ecosystem over the long term, we believe near-term expectations are merging with enterprise opportunities more directly related to centralized computing,” he said. Boyd.

He added, “Also, while we are optimistic about the long-term app security, edge computing, and network security opportunities, we still see a challenging near-term build due to potential go-to-market disruptions, cloud optimizations, and a tough macro.”

Cloudflare Stocks: Technical Assessments

Meanwhile, NET stock holds a best possible IBD composite score of 99, according to IBD Stock Checkup. Furthermore, it is among the AI ​​titles to watch.

The IBD Composite Assessment combines five separate proprietary assessments into one easy-to-use assessment. Additionally, the best growth stocks have a Composite Rating of 90 or higher.

In addition, Cloudflare stock has an accumulation/distribution rating of B-plus. This valuation analyzes the price and volume changes of a stock over the last 13 trading weeks. Its current valuation indicates that more funds are buying than selling.

Rating, on an A+ to E scale, measures the institutional buying and selling of a security. A+ means strong institutional buying; And it means heavy selling. Also, think of C-grade as neutral.

Follow Reinhardt Krause on Twitter@reinhardtk_techfor updates on 5G wireless, artificial intelligence, cybersecurity, and cloud computing.

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