Stock Story -
What Happened: Shares of internet security and content delivery network Cloudflare (NYSE:NET) jumped 5.6% in the afternoon session after the Bureau of Labor Statistics reported that the US producer price index (PPI - prices that businesses charge for their goods and services) in July 2024 increased 2.2% year on year, falling compared to the 2.7% y/y growth recorded in the previous month. The report also revealed a month-on-month growth of 0.1%, below analysts' estimates of 0.2%. In addition, Core PPI (prices excluding food and energy) were flat month on month. PPI is often considered a leading indicator of CPI since what businesses pay tends to be passed through to consumers. Overall, the data confirmed that inflation is cooling off. This is a favorable data point supporting an interest rate cut by the Fed. Notably, markets expect the first rate cut to be announced during the September 2024 policy meeting.
As a reminder, the driver of a stock's value is the sum of its future cash flows discounted back to today. With lower interest rates, investors can apply higher valuations to their stocks. We at StockStory remain cautious, as following the crowd can lead to adverse outcomes. During times like this, it's best to own high-quality, cash-flowing companies that can weather the ups and downs of the market.
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What is the market telling us: Cloudflare's shares are very volatile and over the last year have had 21 moves greater than 5%. In context of that, today’s move is indicating the market considers this news meaningful but not something that would fundamentally change its perception of the business.
The previous big move we wrote about was 12 days ago, when the stock gained 11.9% on the news that the company reported a "beat and raise" quarter. It was encouraging to see Cloudflare narrowly top analysts' revenue expectations this quarter. Operating income beat by a convincing amount, showing that the topline growth is much more profitable than expected.
The company called out some indicators of the growing usage of its platform. These include a 20% growth in developers to 2.4M.
On the AI front, the company's GPUs are now live in 167 cities, mostly driven by developers using some of its AI features.
Moving on, the company raised its full-year revenue guidance, which is always a good sign.
Overall, this was a strong quarter for Cloudflare.
Cloudflare is up 2% since the beginning of the year, but at $80.95 per share it is still trading 25% below its 52-week high of $107.92 from February 2024. Investors who bought $1,000 worth of Cloudflare's shares at the IPO in September 2019 would now be looking at an investment worth $4,499.
