Small Hurdles, Big Rewards- Cloudflare’s (NET) Q4’24

Non-operational benefits still helping NET’s results

We last wrote about Cloudflare (NET) on Substack back in May of 2024 in Weak 1Q for Cloudflare (NET) Points to More Headwinds. The security software stocks had already fallen from their 2021 highs and NET spent most of the back half of 2024 lagging behind high-flying tech stocks. Now, excitement has returned with the stock rallying after November and surging over 20% after Q4’24’s earnings release.

However, from our perspective, NET is merely stepping over low hurdles:

After posting 20 cents in adjusted EPS for Q2 and Q3, the company guided to 18 cents for Q4 and beat that by only 1 cent. It just guided to only 16 cents for Q1’25.

Following the third quarter, management forecast a non-GAAP effective tax rate of 16% for Q4. However, the tax rate came in at 25%. We estimate this was a 2.5-cps headwind versus what analysts had in their forecasts for Q4’24. From their perspective, they likely saw this quarter as beating their forecasts by 3.5 cps. However, below we will see that unsustainable, non-operating benefits could have easily accounted for this outperformance.

Let’s get behind NET’s numbers…

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