Cloudflare: Own The Data Super Highway

Seeking Alpha2022-01-03

SummaryCloudflare has had a formidable 2021 and looks to continue a great 2022 run.Revenue growth has supported the growth story and the stock price.Customers are in desperate need of decentralized ...

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Jason1205
2022-01-04
Jason1205
Bullshit

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The company operates out of two main segments: DDoS threat migration and content delivery networks (CDNs). In today's age, data is becoming more and more important, and having fast and efficient networks lead to overall productivity. Corporations know this and continually pay for Cloudflare's services.Source: (Cloudflare Investor Day 2021)Cloudflare has managed to develop an integrated cloud platform that interacts with each of its product offerings. The primary revenue driver within Cloudflare's product line is its CDN. Today, many major retailers and commercial enterprises rely on their websites readily working fast and efficiently. Currently, Cloudflare serves a large slice of the CDN market worldwide and has carved out a sustainable moat for the future. Considering the increasing demand for fast and efficient data services, Cloudflare looks like an excellent holding for the long term.Rapid Top-line GrowthCompounding value is incredibly important for emerging technology companies. Revenue growth is a great measure of value compounding but also how that revenue is being received matters as well. Considering that large customers are coming back for 100% subscription-based products means that Cloudflare has a part of the market that other large players have yet to tap into. However, at this rate, it may be hard for other web services providers to harp on Cloudflare's momentum.Source: Cloudflare Q3 Earnings PresentationOne of the keys to being a successful software enterprise is rapid top-line growth. Cloudflare has successfully achieved 50% CAGR for the past 5 years which is an astounding achievement for any company. Looking forward, I believe this top-line expansion can continue due to Cloudflare's subscription-based web services.Source: Cloudflare Q3 Earnings PresentationCloudflare's integrated and diversified product portfolio has put the company in a good position when it comes to capitalizing on future trends. Many corporations today are concerned about the security of their networks and their data. To this end, Cloudflare offers a zero-trust web services platform for enterprises to move and communicate data securely. There are a variety of different applications of Cloudflare's networks that could benefit future trends. The primary tech megatrends that the company can help support are the 5G cellular rollout and cloud-based server-less networks. All of these potential revenue streams have granted Cloudflare a TAM of over 100 billion dollars. At a current valuation of $42 billion, the company still has a long way to go on its growth cycle.Enterprise Clients Need Access to These NetworksSome of Cloudflare's most important clients are its enterprise users. Currently, no other CDN has the flexibility and scalability of what Cloudflare offers. This is why large corporations are willing to pay immense subscription fees for access to fast and secure web services. Naturally, gross margins from subscription services will prove to be a major boon to earnings moving forward. This line of business has historically been very profitable and Cloudflare looks to gain from disrupting a very tight-knit enterprise services industry.Source: Cloudflare Q3 Earnings PresentationCloudflare's web services are unique in that they provide quality rentable cloud network services. CDNs for enterprise customers is crucial because if the whole data set didn't make it through, it could spell trouble for the business overall. This is why companies with large data sets like LendingTree (TREE) and HubSpot (HUBS) choose Cloudflare's product portfolio to maintain secure and efficient data transfers.Source: Cloudflare Q3 Earnings PresentationData is the key behind Cloudflare's recent success. More and more corporations are realizing how important metadata is to their overall business success. Cloudflare's producers especially adapt to delivering metadata in its entirety across networks. Larger customers are now flocking to Cloudflare's platform, the company has an almost 70% CAGR in large customers over the past 3 years. The addition of massive enterprise customers will increase subscription income which should have a material impact on earnings.Operations are Moving Closer to ProfitabilityProfitability will be a key marker of Cloudflare's future. At current projections, profitability should come sometime within 2022. When SaaS companies reach the ever so illustrious profitability, it is usually a good sign. This is because the company now has a chance to be self-sufficient instead of relying on outside capital. I believe that due to the already high demand and strong potential earnings growth, Cloudflare has a great opportunity to be a breakout performer in 2022.Source: Cloudflare Q3 Earnings PresentationTraditionally in a SaaS business, gross margin is going to be high. Cloudflare definitely fits the bill as they have averaged high 70% gross margins since mid-2019. This should prove to be a boon to future earnings reports as Cloudflare has been able to maintain their margins while having spectacular top-line growth. Much of the margin maintenance comes down to Cloudflare's continued product rollout. Since IPO products on the network have increased 87%, I believe that with continued software product growth margins will continue to be strong.Source: Cloudflare Q3 Earnings PresentationCloudflare's operating model gives the company valuable opportunities moving forward. By decreasing operating margin, the company is making its way toward profitability. As profitability moves closer into the picture, G&A costs have come down due to organic growth rates. This will be important when looking at future EPS and profitability percentages when determining valuation. At current momentum, if Cloudflare is able to maintain income and revenue growth, the company should be in a strong position during FY 2022.Valuation and PeersCloudflare has a variety of SaaS peers that are similarly valued. Many of these companies have unique tech stacks which enterprises utilize on a subscription basis. The companies I choose to compare Cloudflare to on a valuation basis were Twilio (TWLO), MongoDB (MDB), and Okta (OKTA). These companies are similar due to their mid-double-digit billion valuations and strong growth rates.Source: SA Peer Comparison Tool Gross Profit MarginWhen considering the viability of a SaaS company's long-term potential, it is important to note profit margins. Cloudflare is already beating its competitors by having gross profit margin growth. With already impressive gross profit margins of 75%, Cloudflare has done a great job at scaling their product portfolio.Source: SA Peer Comparison Tool Total RevenueRevenue growth has remained strong for all software names throughout 2020. NET's revenue rate did not match that of Twilio but came in higher than MongoDB and Okta. As Cloudflare continues to scale their products and reach higher paying customers, I believe that Cloudflare could have a breakout top-line year in 2022.Conclusion and RatingCloudflare is a solid software company with an exciting growth runway. Cloudflare was one of the leaders of top-line SaaS growth in 2021, and I expect similar results in 2022 due to the enterprise spending environment. Operationally and financially, Cloudflare is setting themselves up for a strong 2022. 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