• Cloudflare popped on results that point to steady growth over the next year.

  • Results are driven by an increase in large clients suggesting further gains in this segment.

  • The entire cloud-security and cyber-security complex is bottoming as well.

  • 5 stocks we like better than Cloudflare

Cloudflare (NYSE: NET) still has hurdles to overcome, but the bottom is in for this stock. The price action began showing a bottom in the middle of 2022, confirmed now by the Q4 results and the analyst activity they inspired. Market beat’s analyst tracking tools have picked up 6 new commentaries so far and are all bullish.

All include a price target increase with the consensus price target firming after a year of downward pressure. Assuming this trend continues, the price target could increase over the next few months, which would be a tailwind for price action. The salient point today is that the current price target implies about a 30% upside for the stock.

Cloudflare pops on favorable results and outlook

Cloudflare had a good quarter with revenue of $274.7 million, up 42% versus last year. The strength was driven by an uptick in revenue from large businesses, suggesting further gains are in store. The revenue also beat the consensus estimate but only by 22 basis points, which is not enough to rally the market to the degree it is.

That news is in the margin and earnings, which are all up. The company continues to post GAAP losses, but this is due to reinvestment and growth; the adjusted results include a small contraction in the gross margin but expansion everywhere else.

The company reported the adjusted operating income margin increased to 6.8% from 1.2% last year. This drove a 28% increase in operating cash flow and a 12% increase in free cash flow, putting both figures at record levels. The adjusted EPS came in at $0.06, which beat the consensus by a penny or about 2000 basis points, and the guidance is favorable if a little mixed.

The company is guiding for sequential growth on the top line for the quarter and the year but relative to the consensus, Q1 guidance is a little weak, while the full year is a little strong. The opposite is true of earnings, the Q1 period is expected to be strong relative to the analyst while the full year is a little weak, but both are better than what the market feared may come.

"In the fourth quarter, we delivered record operating profit, operating margin, and free cash flow. We also surpassed more than 2,000 large customers paying us over $100,000 per year and signed a record number of deals greater than $500,000," said Matthew Prince, co-founder & CEO of Cloudflare.

The bottom is in for Cloud security stocks

Cloud security stocks, in general, have been under pressure over the last year, but the bottom may be in for the entire group. Results from F5 Networks (NASDAQ: FFIV) were mixed relative to the market expectation at the time but provided some relief for worried investors.

Since then, shares of that stock and others in the group, like Palo Alto Networks (NASDAQ: PANW), which reports later this month, has been moving sideways and building up a support base. Datadog (NASDAQ: DDOG), one of the hardest hit in the group, reports next week and could provide a positive surprise.

The analysts have been lowering their targets for the last few months and have the bar set relatively low at only 3% sequential and 38% YOY.

The technical outlook: Net pops, resistance is present

Shares of Cloudflare popped more than 9% at the open, only to pare back the gains in the first few minutes of trading. This is a sign of resistance at a critical level that could hold the price in check. If the market can get above $64 and hold it, it could increase to the $80 level. That level will provide stiffer resistance but, if crossed, opens the door to a more-sustained recovery.

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