Cloudflare (NYSE: NET) started 2024 strong with a solid set of results in February that sent its shares soaring. However, the stock’s red-hot rally came to a screeching halt last week following the release of its latest quarterly numbers.

The cloud, cybersecurity, and internet services provider released its first-quarter 2024 results on May 2, and the stock plunged 16% as Wall Street was disappointed with its guidance. Cloudflare stock now trades down 31% from the 52-week high it set nearly three months ago.

Let’s see what went wrong for the company, and why its sharp pullback is an opportunity for savvy investors looking to get their hands on a growth stock.

Cloudflare investors may have overreacted

Cloudflare’s Q1 revenue increased 30% year over year to $379 million, easily beating the consensus estimate. The growth in the company’s earnings was even more impressive; its bottom line doubled year over year to $0.16 per share, beating the consensus EPS estimate of $0.13.

Those results were great, but guidance didn’t quite match up with Wall Street expectations. Cloudflare is forecasting $394 million in revenue at the midpoint and $0.14 per share in earnings in the current quarter. The consensus estimate called for $394.5 million in revenue, which means that it fell marginally short. Then there’s the fact that Cloudflare maintained its full-year outlook of $1.65 billion in revenue. That didn’t sit well with analysts who were hoping that it would raise guidance and deliver stronger 2024 growth.

The stock’s sell-off seems a bit odd considering that Wall Street applauded the company’s full-year outlook back in February. And the analysts seem to be ignoring key metrics that show the company is setting itself up for robust growth in the long run, which could lead to an impressive stock price upside.

The company’s growth is likely to accelerate in the future

Cloudflare is adding customers at a good pace, and it’s also gaining a bigger share of customers’ wallets. The company ended the first quarter with more than 197,000 paying customers, a 17% increase over year-ago figures. More importantly, the number of large customers who pay more than $100,000 annually increased at a much faster pace of 33%.

Additionally, Cloudflare maintained a robust dollar-based net retention rate of 115% during the quarter, which was almost in line with the year-ago period’s reading of 117%. The dollar-based net retention rate compares the spending by the company’s customers in a quarter to the spending by that same customer cohort in the year-ago period. A reading of more than 100%  means that Cloudflare’s customers are buying more of its offerings or increasing their usage of current products.

Cloudflare saw a 40% year-over-year jump in remaining performance obligations (RPO) to $1.34 billion. RPO is the total value of the contracts the company has yet to fulfill. The faster growth in the RPO as compared to Cloudflare’s revenue suggests the company is building a solid future revenue pipeline which will maintain a healthy growth rate for years to come.

The improved spending also leads to attractive bottom-line growth for the company. Wall Street seems to have missed that Cloudflare increased its 2024 EPS guidance to a range of $0.60 to $0.61 per share from the prior range of $0.58 to $0.59 per share.

Cloudflare is also expected to maintain solid earnings growth over the long run. The company’s bottom line is expected to increase at a compound annual growth rate of 62% for the next five years. Using its 2023 annual earnings of $0.49 per share as the base, Cloudflare’s earnings could increase to $5.47 per share by 2028 at that pace.

Multiplying the projected earnings with the Nasdaq-100 index’s forward earnings multiple of 26 (using the index as a proxy for tech stocks) points toward a stock price of $142 after five years. That’s a 91% jump from current levels.

Cloudflare sees its addressable market growing to $204 billion in 2026, and the company’s full-year revenue forecast indicates that it is still scratching the surface of this huge opportunity. It won’t be surprising to see it clock impressive earnings growth in the long run.

All this explains why buying this cloud stock right now could turn out to be a smart move.

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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Cloudflare. The Motley Fool has a disclosure policy.

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Source: finance.yahoo.com