“Armchair Trader Series” Recommendations
- Week Beginning -
Monday,  February 08, 2021

by Ian Harvey

IMPORTANT NOTE: This is a recommendation and individual members can use their own discretion as to when to enter or exit!

You may also wish to read Stock Options Made Easy Trading Philosophy

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"Trading Capital Management"



Options Trade – Cloudflare Inc (NYSE: NET) Calls

Tuesday, February 09, 2021

** OPTION TRADE: Buy NET MAY 21 2021 100.000 CALLS at approximately $10.50. (Max. $11.50)

 Place a pre-determined sell at $21.00.

Also include a protective stop loss of $4.20.

The web infrastructure and security stock Cloudflare Inc (NYSE: NET) has already provided us potential profits of approximately 600% when executed a trade back in November, 2020, which expired in January this year.

Cloudflare's mission is to "build a better internet." What that means for its customers is that they can achieve better application performance, improved security, and high reliability for the ever-increasing demands of users. High-tech companies like Hubspot, Shopify, and Zendesk all use Cloudflare to power their cloud applications to ensure customers have services that are always on, with lightning-fast response times.

Cloudflare will announce its earnings results after the market closes on Thursday, February 11th. Analysts expect the company to announce earnings of ($0.08) per share for the quarter.

The company has demonstrated a streak of earnings beats. Hence, as a result of "conservative management", there are real possibilities of earnings beating estimates.

In this case, in the same way as on November 5, there could be an upside of around 10%.

This upward path is feasible with the RSI currently at 59.12 meaning that the stock is not overbought, and the Moving Averages nicely aligned to produce an upside.

Also, fourth quarter's revenue guidance of $117.5-$118.5 million, represents an increase of 40% to 41% year-over-year. More important, guidance for FY-2020 have been raised to $422.5 - $423.5 million, up from the $389.0 to $393.0 million forecasted back in May 2020, showing no COVID impact.

Cloudflare is among the strongest CDN play with their services geared at improving performance of websites. Cloudflare is viewed as providing combined network security and performance solutions.

Cloudflare is an adept of the Free (or Freemium) business model, which makes use of a proven technique for customer acquisition, notably by first giving away a free product and later signing up the customer. This model has successfully been used by companies such as Facebook (NASDAQ:FB) and MySQL, which was subsequently bought by Oracle (ORCL).

Over a three-year period, Cloudflare's revenues has progressed by 128%, with an acceleration in the last quarter by a staggering 54% year-over-year, demonstrate that customers are actually signing contracts involving payment, after using the free version.

The CDN play crossed the 100K paying customer mark during the third quarter. More importantly, it is moving up the ladder by entering more profitable market segments. Thus, in the quarter, nearly 100 large corporations spending more than $100,000 each were added, bringing the total to 736. These large customers accounted for 47% of total revenues in Q3-2020, and the company anticipates to rapidly increment the figure to 50%, going forward.

Cloudflare has also been able to clinch its first $10-million deal thanks to a fortune 500 software company. The customer was acquired in 2016, with the initial deal being valued at only $60,000 per year.

About Cloudflare……

Cloudflare Inc is a United States-based company engaged in the software business. It has built a cloud platform that delivers a range of network services to businesses. The product offerings of the company include Argo Smart Routing, Load Balancing, Web Optimizations, Cloudflare Access, and Cloudflare Spectrum among others.

Cloudflare had its initial public offering in September, and the company's stock now trades up roughly 69% from the closing price on the day of its market debut.

Earnings…..

Cloudflare last issued its quarterly earnings data on Thursday, November 5th.

The company reported ($0.02) earnings per share (EPS) for the quarter, topping the consensus estimate of ($0.05) by $0.03. Cloudflare had a negative return on equity of 12.16% and a negative net margin of 29.17%. The company had revenue of $114.16 million for the quarter, compared to the consensus estimate of $103.18 million. During the same quarter last year, the business posted $0.16 earnings per share. The firm's revenue was up 54.4% compared to the same quarter last year.

Influencing Factors…..

The management has been positioning Cloudflare as a strong security play versus competitors in the secure access service edge market. Hence, according to the executives, they have achieved product differentiation through "ease of use across all of those different products". Also, a unified control plane is provided to users, thereby reducing complexity. As a result, their solution is significantly cost effective.

Cloudflare provides a global CDN with unique performance capabilities and a strong focus on security."

Demand of security products has resulted in an opportunity to offer a new package of services called Cloudflare One. Breaking down the package, it consists of intrusion detection, next generation firewall and data loss protection. According to the executives, Cloudflare One enables a high level of product differentiation as it is "unmatched in the market".

Summary.....

Cloudflare has succeeded in retaining paying customers, but its real success has come from upgrading paying customers looking to gain scale. Given that Cloudflare was able to expertly navigate the challenging 2020 period, it is a belief that it will continue to thrive in 2021.

The stock's 50-day simple moving average is $79.91 and its two-hundred day simple moving average is $57.82. Cloudflare has a twelve month low of $15.05 and a twelve month high of $88.77. The company has a quick ratio of 8.61, a current ratio of 8.61 and a debt-to-equity ratio of 0.45. The company has a market capitalization of $25.30 billion, a price-to-earnings ratio of -211.12 and a beta of -0.02.