Shares of Cloudflare (NYSE:NET) fell by more than 15% on Friday following the release of its latest earnings numbers. The company didn’t have a bad quarter as its revenue for the first three months of the year totaled $378.6 million and came in higher than estimates of $373.7 million. And its adjusted earnings per share of $0.16 also beat Wall Street projections of $0.13.
The big disappointment was the forecast for the current quarter. The company is expecting revenue to come within a range of $393.5 million and $394.5 million. That’s slightly less than what analysts were expecting — $394.5 million to be the midpoint of the guidance, not the top end of it.
The concern is that companies are scaling back their IT-related spending as economic conditions worsen; the earnings release came at a bad time as the jobs report in the U.S. also indicated a slowdown in the economy, pushing the unemployment rate up in the process.
And if the economy is slowing down, that could be trouble for a company like Cloudflare, which generated 30% growth last quarter. And if its growth rate slows down, it will be harder to justify paying a big premium for the tech stock – it’s trading at a forward price-to-earnings multiple of more than 150, and around 40 times book value.
Investors are paying a huge premium for the stock at a time when business appears to be slowing down. Given its steep valuation, the stock’s selloff may not be over just yet. Investors may want to monitor the stock but it’s hard to make the case that it’s a buy today.