We apply a growth-adjusted EV/S ratio to our forecasts to yield our $255 target price, given NET’s ability to deliver 27-30% topline growth. We adjust this ratio vs. current levels to account for qualitative factors such as quality/consistency of sales execution, competitive positioning, and profitability expansion (“Rule of 40” benchmark). 

Our $255 target price is based on ~0.8x EV/S/G ratio on our CY24-CY28E revenue CAGR of ~31%, which implies an ~24x exit multiple. We apply this ~24x target multiple to our CY28E revenue estimate, and discount back to CY24E at 10%, to yield our 12-month target price. Our target ratio is largely in line with the current CY24-26E  EV/S/G ratio to reflect growth upside via GenAI (NET stands to be a big winner as AI-training moves to AI-inferencing with multiple SKUs at play for inflection), excitement about Apple relationship (consumer-facing private AI processing, powering other AI features), a deeper, pedigreed bench (President of Revenue Anderson; President of Product & Engineering Desai), and latent sales productivity ramp from upleveled capacity, following material GTM changes undertaken over CY23 whose effects largely stabilized in CY24, and are slated for inflection/ramp in CY25E. Additionally, greater traction of its enterprise motion should drive upside on FCFM as average deal sizes increase, bringing better unit economics and better LTV.

We rate NET High Risk based upon our quantitative model. Assigning a High Risk rating is also supported by NET’s volatile trading history.

Downside risks to our target price: 1) High multiple = high beta – investor sensitivity to high multiple stocks driving a rotation to value could bring indiscriminate valuation compression. 2) Lower profitability support – sub-optimal margin and FCF production in spite NET’s scale (NET's FCFM margins are 1/3 the level of peers of comparable size) risks constraining valuation support and gate a multiple re-rating in a rising interest rate environment. 3) Hyperscaler, Cloud service provider competition – as a “transit” Cloud, NET competes with “destination” Clouds like AWS and Azure, in that these hyperscalers offer embedded performance (load balancers, delivery controllers) and infrastructure protection (web app firewalls, API protection, DDoS mitigation) for apps and workloads residing in their ecosystems, which stands to diminish NET’s proposition as an independent performance and secure delivery mechanism for business IP traffic. 4) Enterprise GTM investments take longer to season, especially for the security selling motion – NET is in the earlier phases of building out a direct enterprise sales function in its aspirations to more aggressively move “upmarket”. While the portfolio is keyed to the important and lucrative Zero Trust (user security) and SASE (secure SD-WAN, FWaaS) trends in enterprise cybersecurity, this upstream motion could take time to mature and yield against established incumbents in these markets, that span a multitude of IT budget disciplines that NET must successfully disrupt. 5) NET does not regulate entities that use/purchase its platform which could bring political or reputational risk.