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Cloudflare – a wonderful business with a terrible chart

June 4, 2022

A golden rule of stock markets is that it is a bull market until it is in’t and the same for bear markets. This bear market will end when we start getting buy signals but currently we don’t have any of those. It is a world of negative charts with broken trend lines, chart breakdowns, falling moving averages and decline Coppock indicators wherever you look.

Cloudflare’s chart illustrates all of these sell signals. Presently the price is rallying and one of those rallies will be the bottom but until my indicators change direction it would be risky to expect any rally to last.

Cloudflare is a sensational business. Infrastructure and cyber security for the Internet and strong growth in turnover. Latest results, reported in early May, for Q1 2022, were spectacular.

“We had a terrific quarter. In Q1, we achieved revenue of $212m, up 54pc year over year. We added a quarterly record of more than 14,000 new paying customers, up 10pc quarter over quarter, bringing our total paying customer count to over 154,000.

We add 121 new large customers, those that pay us over $100,000 per year, up 53pc year over year to a total of 1,537. Today, 58pc of our revenue comes from those large customers. Our largest customers continue to get larger and larger. Those spending over $500,000 a year, growing 68pc year over year, and those spending over $1m a year, growing 72pc year over year.

We now have 12 customers and partners spending over $5m per year with us. And yet, we remain highly diversified, with no customer representing more than 5pc of revenue. Our land-and-expand motion continues to improve, with dollar-based net retention hitting a new record of 127pc in the quarter, up 400 basis points year over year. New products and an increased interest in consolidating behind a single trusted vendor for network services has been the key to our continued customer expansion.”

How could anyone read that and not feel like buying the shares yet the chart looks threatening. I couldn’t resist drawing the lines again and the chart looks like a breakdown from a head and shoulders top. Just based on the chart I would say that a serious price collapse lies ahead.

If that is correct part of the reason must be valuation. The company is valued at $18.3bn net of cash but analysts are projecting operating profits for calendar 2024 of $75m. The business is going to have to do a lot to demonstrate unequivocally that it is worth so much and that may be hard in a world of rising costs and interest rates and question marks about demand.

Another problem is that the price is well up on its level in opening dealings in September 2019 let alone the IPO price of $15 but even that IPO price was set against the background of extreme optimism about prospects for technology shares.

What we have been seeing in recent months has been disappointing results from a number of technology shares. If this becomes a more widespread phenomenon investors are going to become more nervous and more inclined to seek the comfort of cash.

The problem is that a big chunk of Cloudflare’s valuation reflects optimism on the prospects for a very exciting company. If that optimism fades and perhaps even if it doesn’t with stock markets falling and interest rates rising the shares could fall a long way, which is why my focus since November 2021 when the US stock market peaked has shifted from fundamentals to charts.

When there is so much blue sky in valuations fundamental analysis has little to tell us about where share prices are headed.


The guys who founded and run Cloudflare are understandably pumped up and blazing with adrenaline given the incredible success of their business over a relatively short period. This has translated into a very positive tone at their quarterly analysts’ meetings which has acted like a pump blowing ever more hot air into the share. It seems that bubble has been pricked and there may be more air still to come out of the balloon as investors adjust to a more challenging economic backdrop.

Cloudflare was one of the last shares I held before a falling stock market forced me to go almost completely liquid. it is a fantastic business but the chart is telling me that the shares are at risk of a further substantial decline. We are in a bear market and that is what happens in bear markets.

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