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Why Cloudflare Stock Tanked 5% Today

What happened

Shares of edge computing and internet infrastructure company Cloudflare (NYSE: NET) were down over 5% today as of 3 p.m. ET. For the most part, this is simply a continuation of the selling pressure that has hit Cloudflare and other high-growth but richly valued tech stocks in recent months. With the Federal Reserve on course to start raising interest rates, high-growth business valuations are under pressure.

Cloudflare is now down 60% from its all-time high notched in November, although for longer-term shareholders, the stock is still up 380% since its initial public offering (IPO) in 2019.

Image source: Getty Images.

So what

There was one additional short-term reason Cloudflare may have been under pressure today. On Monday, Citi (NYSE: C) stock analyst Fatima Boolani initiated coverage on the company with a "hold" rating and a one-year price target of $100, implying upside of 13% in the next year.

I'd caution investors not to read too much into the latest market analyst's short-term price target. It can be counterproductive if you're a long-term investor. After all, other analysts upgraded Cloudflare in recent weeks after the recent drubbing it's endured. And even after dropping, shares of the company trade for a whopping 46 times trailing-12-month sales -- all for a company that operates at negative free cash flow. That's an intentional decision Cloudflare has made as it tries to maximize its revenue growth right now. Put another way, an aggressive tech outfit like Cloudflare is going to draw diverse and often conflicting opinions.

Now what

If you decide to buy the dip in Cloudflare, that should be a big if. This stock isn't suitable for the faint of heart or those who can't afford to buy more if shares continue to tank in the near term. It's important to remember Cloudflare is a great company, and this is a long-term investment. It's attracted millions of users of its products and is aiming to disrupt the status quo in cloud-computing infrastructure, like elements of Amazon Web Services (AWS), so it has tons of potential. And it's growing sales at a more than 50% year-over-year clip.

Nevertheless, the stock is going to remain highly volatile in this current market environment that is hyperfocused on the Federal Reserve's evolving policy aimed at taming inflation. That doesn't necessarily mean Cloudflare is a bad purchase right now if you plan to hold the stock for at least five years. Just do so prudently and with the proper expectations.

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Citigroup is an advertising partner of The Ascent, a Motley Fool company. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Nicholas Rossolillo and his clients own Cloudflare, Inc. The Motley Fool owns and recommends Amazon and Cloudflare, Inc. The Motley Fool has a disclosure policy.


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