After surging a whopping 360% alone in 2020, is Cloudflare stock a good buy, or should investors wait for the dip?
Cloudflare (NYSE: NET) is an American web infrastructure and website security company that specializes in the provision of content delivery services, DDoS mitigation, domains, and internet security. The company started 2020 valued at $5 billion, and by the end of the year, it was worth almost $25 billion. We are living in a time where internet usage is at its all-time high, and this trend is set to continue for years to come. Adobe, Walmart, Shopify, Hubspot, the FBI, and the U.S. Department of State, are all Cloudflare clients.
The bull case for Cloudflare
Customers love this product. Cloudflare is great at capturing new customers by using a freemium service, letting users avail of scaled-down services before upgrading. The company has over 96,000 paying customers, growing at a Compound Annual Growth Rate (CAGR) of 24% since 2018. 637 of these paying customers are spending over $100,000, a CAGR of 65% since 2018, and around 16% of the Fortune 1000 are paying customers. Cloudflare’s services are valued no matter where customers are based — with 48% of the company’s total revenue coming from outside the U.S.
So, there are plenty of customers, with lots of room for more — but the money is looking great too. Cloudflare had an impressive 2020, with Q3 revenue growth accelerating to 54% and top-line revenue exceeding $114 million. In the first nine months of 2019, net losses stood at $18.5 million, but Cloudflare has narrowed this down to $5.7 million in the first nine months of 2020. Cloudflare recorded a free cash flow of negative $33.6 million in Q3 2019, or 45% of total revenue, but has successfully narrowed this down to $17.9 million or 16% of total revenue in Q3 2020. Cloudflare manages almost 1,700 employees and has invested heavily in its cloud infrastructure, yet it still manages to maintain an outstanding gross margin of 76.3%.
Cloudflare spends almost a third of its revenue supporting its R&D team; developing new products and enhancing its existing ones. The cloud-based nature of its products allows its teams to look at constant real-world insights into customers’ demands, issues, and usage, allowing Cloudflare to quickly adapt to customer needs.
The bear case for Cloudflare
The company has quite a bit of competition, including Fastly, Amazon CloudFront, Microsoft Azure, etc. However, none of them exactly mimic Cloudflare’s range of services offered.
Cloudflare is not yet profitable. This is a dealbreaker for some investors, but Cloudflare has been focused on reinvesting profits to further expand the business which will set itself up for larger revenue and profits further down the line. Cloudflare could become profitable tomorrow if it wanted but instead decides to invest heavily in R&D and marketing.
So, should I buy Cloudflare stock?
Yes — Cloudflare is a great long-term investment given the increasing demand for internet services and security. The company’s foundations are good and its plans for the future are convincing. The company looks likely to increase its customer base this year, and could be profitable in 2022! The level of competition in this space might worry some investors, but if we look at the internet, technology, and cloud-services industries, we can see that a high level of competition is normal.
What is Cloudflare used for?
Cloudflare is used by website hosters to protect against threats such as SQL injection and identity theft, as well as to speed up loading times and improve site performance.
How does Cloudflare make money?
Cloudflare makes money from its 3 different paid packages. Its pricing structure is subscription-based and not usage-based.
Is Cloudflare expensive?
Cloudflare has a free package with limited features and a Pro $20/month package with a wide range of features. It is one of the most cost-effective providers — Fastly’s packages start at $50/month with no free features.
A MyWallSt subscription gives you access to over 100 market-beating stock picks and the research to back them up. Our analyst team post daily insights, subscriber-only podcasts and the headlines that move the market. Get your free trial now!
MyWallSt operates a full disclosure policy. MyWallSt staff currently holds long positions in companies mentioned above. Read our full disclosure policy here.