What Happened?
Shares of internet security and content delivery network Cloudflare (NYSE:NET) jumped 9.2% in the morning session after the company announced the appointment of Chirantan “CJ” Desai as President of Product & Engineering. This is part of efforts to prepare for its next growth phase, which includes achieving an annual recurring revenue of $5 billion.
Desai is a high-profile tech executive who has a track record for driving innovation at scale. Most recently, he served as President and Chief Operating Officer at ServiceNow (NOW) and helped scale the company from $1.5 billion to more than $10 billion in annualized revenue. During his time at ServiceNow, he oversaw products, platform, design, engineering, customer support, cloud infrastructure operations, and customer success. Many have pointed out that he’s been quoted almost as often as the CEO, especially with regards to product details and updates. Before assuming the ServiceNow COO role, Desai was Chief Product Officer.
In a blog post, he wrote about joining Cloudflare. “The world is in a very interesting moment for technological innovation: the AI landscape is uncharted and developing at an exponential rate; the urgency for enterprises to reduce tech debt and reliance on legacy applications is at an all time high; multi-cloud deployments are becoming a reality for optimal performance and global scale; and high performance connectivity is table stakes. Cloudflare finds itself in a compelling position at the intersection of these key themes.”
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What The Market Is Telling Us
Cloudflare’s shares are quite volatile and have had 17 moves greater than 5% over the last year. In that context, today’s move indicates 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 21 days ago when the stock gained 5.2% as markets roared back after an initially muted response to the Fed’s rate cut, which sparked a renewed appetite for risk assets. While investors were expecting a reduction in rates from the US central bank, there was a bit of back and forth on whether the cut would be 25bps (a quarter percent) or 50bps (half a percent). The Fed ended up slashing its policy rate by 50bps (0.5%) to 4.75%-5.00%. This marks the first rate reduction in roughly four years.
The Fed—under Chair Jerome Powell—began raising rates to tackle inflation coming out of the COVID-19 pandemic when a confluence of supply chain disruptions, labor shortages, and stimulus spending caused inflation to run hot. Looking forward, the Fed signaled that more cuts are possible in 2024/25.
Putting it all together, the announcement and outlook provided a breath of fresh air and a clearer view of the Fed’s monetary policy stance, which the market has been waiting for with bated breath. If there’s anything the market doesn’t like, it’s uncertainty.
As a reminder, the driver of a stock’s value is the sum of its future cash flows discounted back to today. The result of lower interest rates, all else equal, is higher stock valuations. This is especially true for higher-growth stocks such as those in the technology sector, where the current value depends more on cash flows many years out in the future.
Cloudflare is up 16.5% since the beginning of the year, but at $92.49 per share, it is still trading 14.3% below its 52-week high of $107.92 from February 2024. Investors who bought $1,000 worth of Cloudflare’s shares 5 years ago would now be looking at an investment worth $5,664.
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