Is Cloudflare Overvalued?

Cloudflare (NYSE: NET) hasn't fared arsenic good arsenic different cybersecurity stocks this year. It's lone up 13.8% twelvemonth to date, portion competitors similar CrowdStrike (NASDAQ: CRWD) and Fortinet (NASDAQ: FTNT) are up by 49% and 87% twelvemonth to date, respectively. This spread whitethorn beryllium for a reason, and determination is bully origin to judge that Cloudflare is overvalued, adjacent astatine existent levels.

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Profitability remains an contented for Cloudflare

Cloudflare's first-quarter results erstwhile again showed a nett operating loss, which is 1 of the large headwinds holding the banal backmost from a higher valuation. Solid maturation rates matter, but erstwhile a institution has been astir for much than 15 years, profitability matters a batch more.

The institution produced a nett operating nonaccomplishment of $62 million. That's a higher operating nonaccomplishment than past year, but it besides represents 9.7% of revenue, portion the Q1 2025 nett operating nonaccomplishment represented 11.1% of revenue. CrowdStrike and Fortinet are some profitable, which partially explains wherefore those stocks person enjoyed amended rallies.

Revenue is inactive bully for Cloudflare, with full income up 34% twelvemonth implicit year. Like galore cybersecurity companies, Cloudflare enjoys an yearly recurring gross model, which makes it easier to task aboriginal results.

Cloudflare besides anticipates $2.81 cardinal successful full-year gross astatine the midpoint, which represents a 29.6% year-over-year improvement. It's a measurement down from the 34% maturation complaint successful Q1, but it's besides mean for growth-oriented companies to bushed and rise guidance. There was nary guidance for GAAP (generally accepted accounting principles) nett income, indicating that profitability whitethorn stay an issue.

Cloudflare's valuation is already precocious

The price-to-sales (P/S) ratio does not overgarment a beauteous representation for Cloudflare. The banal trades astatine much than 33 times sales, which is akin to CrowdStrike's valuation and much than treble Fortinet's valuation. Still, CrowdStrike delivers profits, portion Cloudflare isn't astatine that level yet.

Cloudflare's P/S ratio doesn't permission overmuch flexibility if gross maturation starts to decelerate successful aboriginal quarters. Artificial quality tin accelerate gross maturation rates crossed the cybersecurity industry, but Cloudflare's caller guidance does not suggest this script volition play retired for the company.