Cloudflare Inc’s Price Target Raised to $46, $67 in Best-Case Scenario: Morgan Stanley

Cloudflare Inc’s, an American web-infrastructure and website-security company, price target was raised by 23% to $46 after a solid second-quarter results, Q3 and fiscal year 2020 guidance, according to Morgan Stanley equity analysts, who also revised their billings estimates by 8% for the outer years and revenue by 4%, 8% and 8% for the fiscal year 2020, FY21 and FY22, respectively.

Last week, the security, performance, and reliability company reported a total revenue of $99.7 million, representing an increase of 48% year-over-year in the second quarter. GAAP gross profit was $75.6 million in Q2, or 75.8% gross margin, compared to $52.6 million, or 78.0%, in the second quarter of 2019.

Cloudflare forecasts a total revenue between $102.5 to $103.5 million in the third quarter of fiscal 2020 and $404 to $408 million for the full-year fiscal 2020.

“We raise our PT to $42 from $34 as higher topline and margin estimates yield a CY30 FCF estimate of $748M (vs $711M prior). We now apply a 44x EV/FCF multiple to our CY30 FCF estimate (38x prior), implying a 1.7x EV/F/G (1.4x prior) which is in-line with the large-cap software median,” said Keith Weiss, equity analyst at Morgan Stanley.

“A $42 price target implies 24.8x CY21 EV/Sales and 0.68x growth-adjusted, a premium to the overall SaaS group at 0.54x growth-adj justified by a large TAM of $30B+, an effective sales motion spanning both SMB and enterprise customers, and importantly durable growth with growth prospects on the horizon around edge compute and yet-to-be-monetized remote access VPN (Cloudflare for Teams). Additionally, valuation is more balanced when looking at SaaS peers growing >30% CAGR (median 22x CY21 EV/Sales),” the analyst added.

Morgan Stanley target price under a bull-case scenario is $67 and $23 under the worst-case scenario. Several other equity analysts have also updated their stock outlook. Oppenheimer lifted their target price on Cloudflare to $55 from $35 and gave the company an “outperform” rating. Zacks Investment Research lowered shares of Cloudflare from a “buy” rating to a “hold” rating. JPMorgan Chase & Co. increased their target price on shares of Cloudflare to $52 from $30 and gave the stock an “overweight” rating.

Jefferies Financial Group upgraded shares of Cloudflare from a “hold” rating to a “buy” rating and boosted their price target to $50 from $27. At last, Needham & Company LLC increased their price objective to $50 from $47 and gave the stock a “buy” rating.

Twelve analysts forecast the average price in 12 months at $47.25 with a high forecast of $55.00 and a low forecast of $34.00. The average price target represents a 21.62% increase from the last price of $38.85. From those 12, ten analysts rated ‘Buy’, two analysts rated ‘Hold’ and none rated ‘Sell’, according to Tipranks.

“Attractive Long-Term Opportunity. Cloudflare’s purpose-built cloud solutions address the complex security and website performance needs of a broad customer base. Penetration into an attractive $30 billion+ TAM depends on the strength of security products and a swiftly expanding solution portfolio, including Workers for the emerging edge computing opportunity and Access/Cloudflare for Teams for remote access,” Morgan Stanley’s Keith Weiss added.

“Risk/Reward Balanced by Near-Term Macro Uncertainty.  Cloudflare, up 120% YTD has significantly outperformed the SW universe/NASDAQ. Current trade of 23x EV/CY21e sales, 0.62x growth-adj is a premium to SaaS avg at 0.54x, supported by attractive LT growth but not without NT risks in our view.”