What we think about Cloudflare (NET)
Cloudflare in Three Words: SaaS, Creative, Ecosystem
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Background
Cloudflare is a global content delivery network (CDN) that offers a variety of services to improve the security, performance, and reliability of websites and applications.
Cloudflare’s mission is to help build a better Internet. It’s a big mission, and the company’s co-founder and CEO, Matthew Prince, doesn’t mince words when it comes to openly stating their ambitions, which is to build not just a great company but an iconic one.
At the core of this goal of building an iconic company is their crazy pace of innovation. Cloudflare is constantly creating new solutions, iterating through them at a breakneck speed. When the business IPO’d in 2018, it was primarily focused on offering networking and application performance services to its customers. That’s services such as protection against Distributed Denial of Service attacks, intrusion detection and mitigation, wide area networking, application firewalls, and content delivery services. But Cloudflare has rapidly evolved. It took advantage of its strategic assets — specifically, its global edge network and flexible serverless architecture — to roll out more value-added services.
Today, in addition to the services mentioned above, the business has added several zero-trust cybersecurity solutions, R2 object storage, alongside network solutions such as MPLS and SD-WAN. That, in turn, has expanded Cloudflare’s total addressable market from $32 Billion in 2018 to $115 Billion in 2022.
Cloudflare reported strong Q1 2024 results, with revenue growing 30% year-over-year to $378.6 million, with operating profit of $42.4 million and free cash flow of $35.6 million. The company continued seeing robust growth with large enterprise customers, adding 122 new clients spending over $100,000 annually to reach 2,878 large customers, up 33% year-over-year. Large customer revenues now account for 67% of Cloudflare’s total sales. Cloudflare’s Workers platform also hit a key milestone of over 2 million active developers, driven by the launch of new capabilities like serverless databases and AI model deployment. CEO Matthew Prince highlighted the innovative applications being built on Workers AI leveraging Cloudflare’s global edge network advantages. The remaining performance obligations (RPO) grew 40% year-over-year to $1.343 billion, with current RPO representing 70%.
However, management struck a cautious tone on the near-term outlook citing increased macroeconomic uncertainty and geopolitical tensions globally, with guidance suggesting deceleration in revenue growth to 27% for full year 2024 to a range of $1.648-$1.652 billion. With a new go-to-market leader and an evolving leadership team, we will need to watch how the company executes in the current macroeconomic backdrop.
With the sharp pullback following the earnings report, the stock is once again closer to being fairly valued to somewhat undervalued. Assuming sales grows at a CAGR of 20% for the next decade and we get margin expansion, the stock appears to be fairly valued around $86.
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