TSP Weekly Tech Stock Update—June 1, 2024
This Week: Zscaler delivers strong billings growth, MongoDB disappoints, Elastic's AI growth prospects, Nutanix's larger deals, BofA bullish on DDOG, NET shares retreat, SNOW Data Cloud Summit & more.
Hello from Rob…
—Cloudflare (NET, $67.69) shares are down 42% from the 52-week high of $116 reached just a few months ago and are off 19% YTD even though the company continues to deliver healthy growth.
Shares of the cloud platform provider are often volatile around earnings reports. For a high-valuation name, it comes with the territory. In early February, the stock surged 19.5% in one session and hit the new 52-week high following the release of strong Q4 results. Things were a bit different after the Q1 report in early May, as the stock dropped 16.3% in one session because Cloudflare only maintained its 2024 revenue outlook.
The March quarter was actually solid, with total revenue gaining 30% to $378.6 million, topping the consensus estimate by 1.5%. Sales cycles were consistent with Q4, while overall sales rep productivity from existing team members improved year over year and new pipeline attainment exceeded internal expectations. The dollar-based retention rate held steady sequentially at 115%.
In Q1, the total paying customer base expanded by 17% to 197,138. There was sustained demand momentum evident at large customers. Cloudflare added a record number of net new accounts spending more than $100k, $500k and $1 million a year. The total number of customers with annual recurring revenue (ARR) above $100k advanced 33% to 2,878. This large-customer cohort represented 67% of total revenue, up from a contribution of 62% in the year-ago quarter.
In terms of go-to-market, Cloudflare continues to focus on boosting sales performance. In February, Cloudflare named Mark Anderson as the new president of revenue. He boasts a proven track record of scaling revenue across various enterprise tech companies. Anderson most recently served as the CEO of Alteryx, which was taken private in March. Previously, he was a key sales leader at Palo Alto Networks (PANW) and oversaw all sales activity at F5 Networks (FFIV).
Anderson has been on the Cloudflare board since 2019, so he has in-depth knowledge of the company’s operating profile and portfolio of products. While he’s only been in his new role for a few months, Anderson is clearly ready to make changes. On the Q1 earnings call, he said he was surprised at how much room for improvement he saw throughout the sales organization. He plans to boost efficiencies across sales teams while adding more experienced sales talent.
While there was plenty to like in the Q1 results and Q2 revenue guidance came in above the consensus, Cloudflare shares still tumbled after the earnings report because the company did not raise its 2024 revenue outlook from the initial forecast of $1.65 billion (representing growth of 27%). Management said it was just being cautious based on global macro uncertainty. Plus, maintaining the outlook gives Anderson some short-term cover to make sales force changes that will be positive over the longer-term.
Going into the Q1 report, Cloudflare was trading at an unforgiving valuation. Even after the big pullback, the enterprise value is still 13.7 times the 2024 top-line guide.
Following the report, several Wall Street firms lowered their Cloudflare price targets, a few of which are now around the $80 level. Among the more bullish firms, Baird trimmed its target to $94 from $100, but kept its ‘Outperform’ rating based on the company’s long-term growth prospects. Given the current economic uncertainty, the firm thinks management was being prudent in not raising 2024 revenue guidance.
KeyBanc maintained its ‘Overweight’ rating, but reduced its target to $94 from $132. The firm believes the company’s high valuation is warranted given the increased focus on network access and security. KeyBanc sees Cloudflare as well-positioned in edge/serverless compute over the long haul.
*Inside This Issue: CrowdStrike Earnings Preview
—Paid subscribers will receive the June 2024 PDF of Tech-Stock Prospector (TSP #268) via email on Tuesday, June 11.
—Paid subscribers have access to the TSP Market Overview and TSP Portfolio Updates sections inside this issue.