During a gold rush, most prospectors won’t find much, if any, gold. The real winners are those who supply prospectors with tools that they need, such as picks and shovels. Today, these suppliers don’t even need to provide a physical tool. And they can profit from selling a service with a recurring revenue.
That’s where cloud service companies come into play. Spending is slowing, even as it’s grown 19 percent over the past year.
Pick and shovel plays in this market are taking a hit. It likely won’t last.
One name in the space is Cloudflare (NET). Shares dropped over 20 percent on Friday as the company cut its guidance. Analysts expect more cuts.
But the company’s core business is intact, and even in a slow-growing environment, it can still grow at a double-digit rate. Friday’s drop overlooked the fact that the company beat on its earnings expectations by 100 percent, and revenue came in just slightly higher than expected.
Action to take: Investors should look to buy shares under $50, and take advantage of any market selloff to add to that stake.
For traders, shares are trending lower in the short-term, but may hit long-term resistance soon. The June $40 puts, last going for about $1.45, can potentially deliver mid-double-digit returns. From a bottom in the low $40 range, traders can flip to buying a call option to play a rebound rally.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.