Hold Off on Buying Cloudflare After ‘Stellar’ $696 Million Update
The cloud services and internet infrastructure firm enjoyed some strong earnings, but investors should wait until the stock makes this move.
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On Thursday evening, Cloudflare went to the tape with the firm’s second quarter financial results. For the period ended June 30, the cloud services and internet infrastructure provider posted an adjusted EPS of $0.29 (GAAP EPS: -$0.48) on revenue of $696.061 million. These top- and adjusted bottom-line results both beat Wall Street’s expectations while that sales number was good enough for year-over-year growth of 35.9%. The stock is running higher on these results. Let’s take a look.
CEO and co-founder Matthew Prince commented on the quarter. Prince wrote:
“We delivered a stellar second quarter, highlighted by revenue accelerating to $696.1 million, up 36% year-over-year, and record growth in total paying customers, large customers and developers on our platform. As the web shifts to AI answer engines and agent-driven commerce, we are seeing a fundamental rewrite of the Internet for machine-to-machine traffic. Cloudflare sits at the center of this paradigm shift — building the infrastructure, controls, developer tools, and payment rails for the Agentic Internet.”
Prince added:
“The business model of the web is changing, and no company is better positioned than Cloudflare to help define its future.”
Operations
For the period, with sales up 35.9%, gross profit increased 30.2% to $499.517 million as gross margin dropped from 74.9% to 71.7%. Total GAAP operating expenses grew 56.4% to $705.213 million. This left a GAAP operating income/loss of -$205.696 million, down from -$67.264 million. After adjusting for stock-based compensation and the amortization of acquired intangibles, among other items, operating income lands at $96.111 million, up from $72.315 million. GAAP operating margin dropped from -13.1% to -29.6%. Adjusted operating margin dropped from 14.1% to 13.8%.
After accounting for interest, other income and expenses as well as for taxes, GAAP net income/loss printed at -$169.981 million, down from -$50.446 million. That works out to -$0.48 per fully diluted share, down form the year-ago comp of -$0.15. After adjustments, net income increased 43.6% to $107.78 million. That adjusted EPS hit the tape at $0.29, up from $0.21.
Guidance
For the current quarter, Cloudflare is projecting an adjusted EPS of $0.34, with revenue landing in between $736 million and $737 million. Wall Street was looking for $0.32 on $722.7 million, so this was a beat.
For the full year, the firm now expects to earn between $1.25 and $1.26 per share on an adjusted basis, up from previously issued guidance for $1.19 to $1.20. Full year revenue is seen at $2.86 billion to $2.87 billion, also up from previously issued guidance. Consensus had been for an adjusted $1.20 per share on $2.81 billion in revenue. Another beat.
Fundamentals
For the period reported, Cloudflare generated operating cash flow of $117.564 million. Out of that number came traditional capex spending of $49.961 million and capitalized internal use software of $11.219 million. That left free cash flow of $56.384 million (+69.4%). Cloudflare does not return capital to shareholders.
Looking over the balance sheet, the firm ended the period with a cash position of $4.163 billion. This puts current assets at $4.778 billion. Current liabilities ended the quarter at $2.628 billion, including short-term debt of $1.293 billion, but also deferred revenues of $812.187 million. The firm’s headline current ratio stands at a healthy 1.82. Adjusted for deferred revenues, that ratio rises to 2.63.
Total assets amount to $6.474 billion, of which only a small portion is labeled as either goodwill or other intangibles. Total liabilities less equity comes to $4.854 billion, including $684 million in longer-term debt. The firm can cover its entire debt load with its cash position. This balance sheet is strong.
Opinion
The quarter was solid, at least on an adjusted basis. Margins are under a bit of pressure. That said, the guidance is strong, cash flows are healthy and the balance sheet is in very good shape. Wall Street is already on top of this one.
Readers will see a stock breaking out of a rising wedge of bearish reversal to the upside. What we know from the past is when a stock breaks out in the opposite direction of a technical setup, the move can be quite aggressive in nature. Both relative strength and the daily MACD are looking quite supportive of a bullish move as well. The shares, while trading higher, are now well off of their highs for the day. I would not look to buy this attempted breakout unless support is found at the upper trendline of the wedge. Otherwise, investors can wait for a test of either the 21-day EMA or 50-day SMA.
At the time of publication, Guilfoyle had no positions in any securities mentioned.
