Thanks @eesau!!! Good sparring is important. Cloudflare is in my portfolio because it has shown continuous growth of over 40-50%. I build my narrow portfolio from a few global growth companies. And the company must be innovative and disruptive itself. And the company must be part of a whole where significant new added value is surely created (-> from this comes true growth potential). AI will bring enormous added value in the coming years. One can explore this from Nvidia’s and Upstart’s materials. A mandatory condition for AI is efficient and reliable Edge Computing capability (-> Fastly, Cloudflare, etc.). Earlier in this thread, I described Cloudflare as a company. The company culture and values are exemplary. That’s why Cloudflare is in my portfolio, among many companies benefiting from the AI megatrend. Now, to the part that Inderes always warns about: spreadsheets are dangerous. But it’s a free country, and everyone can choose their own tools. If Cloudflare grows at a 40% rate for 5 years and then at a 30% rate, and if it raises its free cash flow to the company’s long-term target of 20% in 2030, then in 2030 Wall Street will value the company at 480 billion dollars. This would then be almost a tenbagger from today. And compared to that, this year’s stock volatility is just what it is. But I say quite directly that managing my own portfolio is really difficult. The sell button is constantly tempting. But writing this helped me structure my strategy, and I hope I gave some thoughts to others as well. Since AI is now at a turning point, would Inderes be interested in holding an AI podcast where AI would be dissected from an investor’s perspective, something for the Inderes people to consider, what do you say @Verneri_Pulkkinen?
My conservative view on the valuation was mostly focused on last week’s jump, when the stock continued its ascent after having already surpassed the level prior to the quick dip. I can’t comment on the big picture of the valuation.
It will be interesting to see what happens.
https://cloudflare.net/news/news-details/2021/Cloudflare-Collaborates-with-Microsoft-and-Major-Search-Engines-to-Help-Improve-Websites-Search-Results/default.aspx
This was a surprise move. Continuous product development at the core of the internet. Cloudflare’s customers/business will now enjoy the best search engine performance: “Cloudflare customers can ensure users see the most up-to-date version of their content, all with a single click.”
I wish more people would join this group to follow along as NET challenges the FAANGs. There’s something special about this likeable company. Okay, enough with the emotions – you shouldn’t fall in love with a stock 
https://twitter.com/eastdakota/status/1450142147282411524
Competitor comparison…Cloudflare as the leader
https://twitter.com/eastdakota/status/1453380747742498820
Off to the conference call, and post-market doesn’t seem to indicate that NET will slide, at least not yet. A quick 5-minute read tells me that things are progressing as planned. The market is divided. Some are gasping at the valuation, and some, for some reason, keep buying and buying and buying… the stock is going up like a helium balloon… I’ll get back to this once I’ve had a chance to delve deeper.
https://cloudflare.net/news/news-details/2021/Cloudflare-Announces-Third-Quarter-2021-Financial-Results/default.aspx
First “break-even” quarter, and revenue and customer numbers continued their strong growth. Based on the aftermarket, at least it was acceptable to the owners, at the time of writing, the share price is +4.77%.
Reality wiped the floor with my conservative view quite spectacularly 
The market frontran that break-even quite well, or whatever was driving the valuation these past weeks. I’m not exactly a “growth investor” but those were indeed impressive growth numbers, and it’s a big milestone for a growth company when the profit starts to go above zero - and thus perhaps a basis for the value to rise permanently to the next level. 
Holding Cloudflare shares is based on alchemy, as the EV/Sales (TTM) is now 113. But let’s still take a look at the company based on Q3 figures:
Revenue Q3 Y-to-Y 51%. The most important aspect of growth is the quantitative share of large customers. From Q3 2020 to Q3 2021, the number of large customers grew by 71%, and 63% a year earlier. This signals accelerating growth, as over 50% of revenue now comes from this segment.
Cloudflare’s development approach is incremental, meaning solutions evolve piece by piece and precisely to meet specific needs. Matthew Prince emphasizes this, describing that they develop products backward, meaning they create what customers request and state they need. Incremental software development, products designed for genuine needs, and scalable cloud production are the drivers of accelerating growth.
Dollar-Based Net Retention (Q3 124%) indicates how much more the same customers are buying now than a year ago. This figure does not account for new customers or those who have transitioned from free to paying customers. This number is extremely high and provides a foundation for accelerating growth, because even if NET didn’t acquire any new customers, revenue would still grow by 24% annually at this rate.
Excellent performance, but the big question is what causes the company’s value to reach a level that no one publicly justifies. Investment banks are silent with their recommendations. People on some US forums are even angry at the company when it doesn’t dip enough.
I leave the following poignant article for you to read.
At first, I thought this contained the ingredients of a black swan, but is this ultimately what Wall Street likes? That is, a company with strong American principles, and in a truly good sense, even though the company found itself in a difficult situation in that article.
An idea for Verneri @Verneri_Pulkkinen. Inderes could start running an “Alchemy of Investing” theme, where disruptive companies are opened up from an investor’s perspective, but without the compelling need to set a target price. This Cloudflare now requires investor alchemy to support the numbers. Even on the Helsinki stock exchange, there are disruptive companies where market value and current situation do not align in the numbers.
Having been involved in cloud operations for a long time, I ended up investing in Cloudflare primarily based on their excellent products (well, and of course, great growth, etc., etc.).
Amazon, for example, has competing services for similar purposes, but Cloudflare is light-years ahead in these areas. Of course, AWS’s offering is vastly broader, but in its own niche, Cloudflare is superior. The customer service has also been really high-quality, and as a customer, I’m not at all surprised by the previously mentioned growth in Dollar-Based Net Retention.
Cloudflare’s offering is also constantly growing; although CDN and DDoS protections, etc., are the company’s cornerstone, the company is slowly but surely moving more and more into AWS’s territory with its serverless offering. I have a small hunch that Cloudflare will be an attractive acquisition for one of the larger players.
First, happy Father’s Day, however each of you celebrates it.
I did a lot of work and read Cloudflare’s Q3 2021 Earnings Call Transcript. It can be found on the company’s website.
My general observation is that Finnish companies do not open up their business as well as is customary in the US. Perhaps we don’t have such a forum, or perhaps I haven’t found it myself. And secondly, THIS IS NOT INVESTMENT ADVICE. It’s just so much easier to write this when you know what I personally think as a private investor, and I don’t just beat around the bush too much. So, let’s begin.
Cloudflare’s mission of reliability, security, and speed are everything to them. In addition, customer ROI has risen to the fourth goal. The company is strongly disrupting the business of so-called legacy cloud service providers, with R2 being the latest method. The company positions itself between the customer and the legacy cloud provider. It offers everything the legacy providers do, and more, and at a lower cost. The company’s software solutions have enabled 95% of the world’s people to be within 50 milliseconds of Cloudflare’s network. The company’s management has previously stated in their presentations that their infrastructure is built on commodity hardware, and they can continuously tender hardware suppliers. In other words, the company relies entirely on its software → according to the company, they had no problems with infrastructure procurement in Q3.
In the last 12 months, 250,000 experts applied to work at Cloudflare! There are now approximately 2,000 of them. So, the best expertise is guaranteed. The company opened up well about the new deals secured at the beginning of Q4. From those, I estimate that the company’s own claims about its efficiency, speed, and innovativeness are true. The cost of Cloudflare’s service is marginal compared to what banks or industry still spend on ICT today, especially legacy ICT.
What is special is the company’s promise that they have never and will never sell customer data. Privacy is a cornerstone of the company’s values. The company has clarified this before; they can programmatically ensure data location as desired by the customer. The principle of 100% data protection differentiates the company from others. Now Matthew Prince said that they have never sold and will not sell customer data. In a way, this also links to the WIRED article shared earlier.
Amit Daryanani (Analyst Evercore Group LLC) asked during the Q3 discussion how Cloudflare would react if AWS were to reduce the current 80x egress fee to zero (among other things, NET is now disrupting this fee). Prince said they would dance with joy with customers, because then the internet would be closer to what it was intended for, and customers would be able to utilize the best offerings from Amazon, Google, Microsoft, and Oracle, which Cloudflare also strives for.
They themselves say that they cannot predict what Web 3.0 means for their business. Prince was asked what autonomous driving means for them. The answer is fundamental: “And if someday driverless cars use it (= Cloudflare) too, that’s great. But in the meantime, we’ll focus on real problems of the moment.” The company’s description of its operations is consistent: Do what customers want, do everything programmatically, disrupt legacy clouds, strong ESG, invest all profit in product development and marketing. In other words, the company constantly brings new services to its customers. Matthew Prince has described his company as a flywheel that helps its customers at an accelerating pace. This is a credible claim when one delves into the company’s way of doing incremental/piloting product development through its millions of users.
Finally, Cloudflare is one option for a stock portfolio that aims to invest in successful global companies for the next 5-10 years.
The potential market can also be assessed through the article I shared below. I believe Cloudflare itself is creating Web 3.0, even though it avoids commenting on the matter by all means. I understand very well that Prince wants to keep discussions and expectations within certain frameworks.
Michelle Zatlyn, co-founder, tells in her own powerful way how Cloudflare is working on its mission: a reliable, secure, and fast internet - for everyone. The interviews with the founding duo exude both of their strong values, which they implement through the company they founded. In addition, Zatlyn is also an active networker and investor. Matthew is primarily responsible for technology and legal affairs, a nerd through and through. Challenging the big players is a side plot but not the main purpose, which must be done to achieve the mission.
This week, Cloudflare Full Stack Week has been underway, where a bunch of new services and improvements have been announced, especially for the serverless side, which I mentioned earlier.
In my opinion, nothing mind-blowing, but I believe many of the services will be attractive and clearly cheaper for startups than AWS’s equivalents.
Incremental development and building something bigger from small streams has been NET’s operating model. It seems to be working.
First of all, happy Independence Day!
I popped into another thread to get some sparring on SaaS company pricing:
Stock Price Inquiries, Horrors, and Hypes - Thread
I must say, my understanding grew a lot; at the end of the back-and-forth, I drew the following conclusion in the thread: “After a moment of reflection, indeed, a P/S of 50 means that free cash flow is 20% of revenue and the company’s revenue grows in forecasts and then in real life at an annual rate of 30% (in the calculation, WACC is 6.4% and Term is 3.1%). So some company always does it, and we see a multibagger. Even if you buy at a high P/S level.”
So, 30% long-term growth and increasing free cash flow (or the ability to increase it) to 20% of revenue lead to these high valuations. And that comes from a proper cash flow statement. But then, a growth leg of about 10 years is assumed, and an analyst is tasked with pricing it to the year 2030. Sorry if this gets complicated, but I’m trying my best to rationalize these things. The US stock market is the most efficient in the world, so it’s quite difficult to challenge it for mispricing.
@Tepi1 says what it’s essentially about… the company is constantly introducing new services → from this, years of compound growth CAN arise. The investor just has to keep noting these small streams and monitor whether the growth looks strong and stable, evaluating it every quarter. Of course, everyone chooses their investment style; what I’ve written here is stock picking where you have to be able to stay put and not get too provoked by price fluctuations.
Well, Cloudflare certainly doesn’t lack effort; sometimes their direct challenge to Americans in a duel is frightening… so they’re directly saying “send a picture of yourself removing your Palo Alto firewalls (and switch to NET products), send a picture of it and win a trip to Hawaii”…
https://www.sdxcentral.com/articles/news/cloudflare-ceo-ditch-palo-alto-networks-win-a-trip-to-oahu/2021/12/?hit=ed017462-c3bd-4a32-badf-e0d09631ad9f&utm_campaign=twitter&utm_medium=social&utm_source=sdx.io
Just when the customers were transferred from Palo Alto to Hawaii :), Cloudflare’s first acquisition was announced, where the acquired company was built directly on Cloudflare’s development environment, Workers. Some companies hope for growth, but this company ensures growth by constantly innovating in different ways.
https://cloudflare.net/news/news-details/2021/Cloudflare-Acquires-Zaraz-to-Boost-Website-Speed-and-Security-Without-Sacrificing-Privacy/default.aspx
This McKinsey article has very commendably elucidated the value of cloud migration by 2030. The EBITDA impact, i.e., the improvement in operating profit, could be $1 trillion by 2030. It’s worth a look. Cloudflare is a cornerstone of cloud services, one of the essential tools that companies/organizations/people can use to generate that trillion for their businesses. Since stock prices also factor in discounted future earnings, the value of that cloud migration in 2030 with a P/E ratio of 10 would be $10 trillion.
Well, this is a nicely put together Impact Report, the company’s first of its kind. I pulled an image from the report concerning the company’s Employee Resource Groups theme. It feels like the report genuinely embraces the world. This is how quality companies operate.
Before Christmas, Beth Kindig (I/O Fund) published an article in Forbes:
https://www.forbes.com/sites/bethkindig/2021/12/23/cloudflare-stock-ambitious-company-must-prove-its-valuation/?sh=2940b058265c
Perhaps the most interesting part of the article was this sentence: “However, being a great company is sometimes confused for a great stock. At the current valuation, Cloudflare has no room to explore these new markets and find its footing.” And elsewhere: “We prefer to wait from the sidelines for a more attractive entry.” The article compared SaaS company valuations. I felt something was missing. I missed I/O Fund’s observation about what it means that Cloudflare physically and programmatically holds all the cards. Its network allows applications to be instantly deployed everywhere. DDoS attacks are mitigated without degrading performance. R2 storage => egress fees to zero => NET’s cloud is chosen over others, etc. I tip my hat to I/O Fund for still knowing how to refrain from buying the stock and waiting for a lower price. Perhaps this is the difference between an amateur and a professional.
In the same breath, it must be noted that I/O Fund’s main competitor, ARK Invest, also managed to divest almost all of its Cloudflare shares during H2/2021:
This is where the interest in the whole stock market lies. Each of us has our own stock path. And everyone can still win .