Cloudflare stock has reversed sharply since October, falling from its year-to-date high of $370 to $264 as investors worry about its hefty valuation ahead of earnings. Several notable analysts have downgraded the shares, and insider selling has added to the pressure. So will the stock keep falling, or will it resume its uptrend after earnings?
Analysts have turned bearish on Cloudflare
Cloudflare has become one of the biggest beneficiaries of the artificial intelligence boom that has led to the proliferation of AI agents. AI agents such as Meta Platforms’ Muse can now visit websites and execute transactions.
As a result, demand for software that confirms that humans are behind the visits is soaring, a move that is benefiting Cloudflare. That explains why the stock jumped by 135% from its February low to its highest point in October.
The challenge, however, is that investors have turned cautious about its hefty valuation. Kyro data shows that the company has a forward price-to-earnings ratio of 216, much higher than the technology sector’s median of 21. This multiple is also higher than the S&P 500 average of 19.
Several analysts have slashed their targets. Raymond James moved it from a strong buy to underperform, while Fox Advisors and TD Cowen slashed the rating to neutral and hold, respectively. Jefferies cut its target from $350 to $320.
Cloudflare’s insiders have also continued selling their shares. They have dumped 447,731 shares in the last three months. At the current price, these shares were valued at over $110 million. They have dumped over 3 million shares in the last 12 months.
Cloudflare’s earnings need to be strong to justify the valuation
It is against this backdrop that Cloudflare will publish its earnings report on Thursday. The company will need to release strong numbers to justify the high valuation.
Its last earnings report, Cloudflare said that its revenue jumped by 36% to $696 million in the second quarter, with its non-GAAP net income rising to $107.8 million.
Yahoo Finance data shows that the company’s revenue is expected to come in at $739 million, higher than the company’s guidance of between $736 million and $737 million. Its earnings-per-share is expected to come in at 34 cents, higher than the 27 cents it made last year.
Therefore, for the stock to rebound, the company will need to publish strong financial results and boost its forward guidance.
The options market is pricing in heightened volatility, with implied volatility jumping to 233%, well above the historical volatility of 57%. The put/call ratio stands at 2.53, a sign that investors expect the stock to fall. Most of the puts are concentrated at the $242 strike.
Cloudflare stock technical analysis
NET stock chart | Source: TradingView
The daily chart shows that the NET stock has been in a strong sell-off in the past few weeks. It dropped from a high of $370 in October to the current $265. Its current price is along the 50% Fibonacci Retracement level and along the 200-day Exponential Moving Average (EMA).
Therefore, these technicals point to two potential scenarios. It may drop to the 61.8% Fibonacci Retracement level at $240. The alternative scenario is where the stock bounces back as investors buy the dip and moves closer to $300.
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