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Wells Fargo says this IT services stock can rally more than 40% from here

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Cloudflare is poised for a big comeback going forward, according to Wells Fargo. Analyst Andrew Nowinski upgraded the stock to overweight from equal weight, raising his price target to $65 from $62. The new target implies upside of 42% from Friday’s close. He said the stock, which is down 65% this year, is at an attractive entry point as it gains market share and sees investments pay off while lowering costs through consolidation. He also said that a sign of the company’s future health could come during its earnings call early next month. “While no company is recession-proof, we believe Cloudflare will deliver strong results on the 3Q22 earnings call, suggesting the company could be more resilient to a recession than other companies,” Nowinski said in a note to clients. Cloudflare’s move to Zero-Trust architecture — a cybersecurity approach that requires devices and users to be constantly verified — is also being viewed as something that will save customers money, reduce complexity and improve performance and security, Nowinski said. He added that this is helping the stock long term, while also making a beneficial short term play through consolidation. Meanwhile, Nowinski pointed to increased satisfaction within the reseller community, a key focus for the company. “Cloudflare had the best overall results in our 3Q22 Reseller Survey and were +19% net positive (up from +13% in 2Q22). We believe the company is seeing strong demand for the Cloudflare One (SASE) platform, as 26% of resellers noted Above Plan results (up from 16% in 2Q22),” he said. Nowinski also noted Cloudflare’s 50% growth compared to the prior year over the last eight quarters, with expectations for the quarter being announced next month to also hit that marker. He said outlook would also be helped management can deliver on its previous expectation of positive free cash flow in the second half of 2022. But the stock has had a difficult year with potential headwinds going forward. Some investors have questioned the penetration ability of Zero Trust against Zscaler and other competitors and of the “Workers” plaform. There’s also concern over the sustainability of 50% revenue growth and, if met, positive free cash flow. — CNBC’s Michael Bloom contributed to this report.

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