I’ve made the biggest investment mistake this year – not selling Cloudflare (NET) stock and taking profit much earlier. I should’ve sold or at least trimmed my position of NET in late November or early December. I’ve got plenty of opportunities to reduce my position, but I didn’t do so. I didn’t even consider to sell until the price of NET had been collapsed 40% plus from its top and consistently underperformed the general market and other SaaS stocks, and I suddenly realized that I should sell. I can blame that I’ve no time to monitor and act quickly enough as there have been a lot of things going on in my personal life, but that’s only an excuse.
So, what’s wrong with NET stock? The most important factor of my investment decision is always the price action. NET has been transformed from an outperforming stock to a underperforming stock; from one extreme to another extreme. The YTD return once reached its high of +191.7% on 18 Nov, but since then collapsed from 221.64 to 123.9, a drawdown of 44.1%, which was worse than the 39.8% decline in Mar 2020 and the 36.3% correction in Feb 2021. That’s basically the worst drawdown of NET historically! It happened while the general market has been holding up pretty well. That’s a change of the price behavior. That’s actually delivering a message that shouldn’t be ignored.
NET has been respecting an upward channel since its IPO (see figure below). So, what I expect and can tolerant was a similar drawdown as the Feb 2021 correction, i.e. -3x%. I didn’t expect the price would hit the bottom of its upward channel, meaning that the situation was worse then that of Mar 2020. Unfortunately, it did.
Here was what I’ve written in the last article:
NET has always been critisized for its high valuation. But if it keeps going up, you shouldn’t try to go against the market.
Now, I knew that the movement from 108.93 to 221.64 during Oct and Nov was a climax movement. The hype was built around the announcement of R2, an object storage service to challenge Amazon AWS S3. However, the valuation was not able to live up to the expectation of the new R2 product. Now the party was over. NET was punished by its high valuation, and I shouldn’t try to go against the market.
Bear in mind that R2 was only a product announcement. As far as I know from their developer Discord, R2 won’t be delivered in the first half of 2022 (See screenshot below). Cloudflare is said to be delivering products quickly, but if it takes so long to deliver R2, it will take even longer for them to develop a distributed database which they currently lack to make their developer cloud solution a complete solution, not to say to challenge AWS and other cloud providers to become the 4th cloud provider.
Anyway, I’m still satisfied with the overall profit on NET for holding almost one year. I sold @137 with average cost ~79, harvesting a profit of 73%.