Cloudflare - CDN and the fight against denial-of-service attacks

Stocks
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Cloudflare is a company founded in 2009, headquartered in California, primarily offering a content delivery network and DDoS protection. This company has been mentioned a little in several different threads, but I decided to open a dedicated thread for it - I am a novice investor and not a guru in this field, so my “opening post” is a bit clumsy. Hopefully, this will spark good discussions.

Direct quote from Wikipedia:
“A website that has Cloudflare’s services enabled does not distribute its content itself; instead, Cloudflare acts as a reverse proxy for it. Website users then connect to Cloudflare’s server, which acts as a cache for the requested data. Cloudflare has significantly more capacity available than a single network server, and it can smooth out traffic peaks when multiple users try to access the site. In addition, the company’s services are designed to be fault-tolerant”

Here are some numbers from recent years:

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Cloudflare’s IPO was in September 2019 (candle=week):

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Target price table quoted from WSJ, although this doesn’t have much significance:

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The results for the first quarter of 2021 exceeded expectations, and the company’s CEO and founder Matthew Prince lauded an record-breaking start to the year. The number of customers surpassed the 4 million mark, and the number of large customers increased by 70 percent from 2020, with large customers representing over half of the total revenue. However, soon after Q1, the stock price rose only to turn back into a sharp decline, but I don’t know the reason. For this year, Cloudflare expects 40 percent revenue growth compared to the previous year, and scalability is said to be available for cloud services. On the other hand, this growth company employing 1800 people is still making a loss.

This was one of the very first foreign stocks that ended up in my portfolio after my quick research/gut feeling and because some recommended it. :roll_eyes::upside_down_face: My third domestic language is very weak, so I apologize for not being able to explain the company better (I haven’t added anything to my long-term portfolio on such weak grounds since then). I noticed that there are just under 2,500 owners of this stock on Nordnet, so there are probably plenty of other Finnish shareholders on this forum, so it would be nice to get a discussion going around this - let this thread opening serve as a discussion starter. :slightly_smiling_face:

Thank you!

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It was great to find this dedicated Cloudflare thread. I personally stumbled upon Cloudflare through Nvidia news three months ago:

I’ve distilled it for myself as Nvidia being, and continuing to be, one of the key trendsetters in AI (artificial intelligence). Nvidia knows (and Tesla knows) that, for example, autonomous car driving is not possible if there is latency – a delay – in using AI. Nvidia wants to take AI applications To The Edge, meaning, in plain English, close to the point of use. Cloudflare offers exactly that. In other words, Cloudflare provides a secure and fast internet – meaning it can bring AI to the point of use, whether it’s an autonomous car, a farmer in the US doing cultivation work, or a cucumber grower in Japan (Jen-Hsun Huang of Nvidia often talks about these use cases). Cloudflare titled the Nvidia partnership: “Cloudflare Partners with NVIDIA to Bring AI to its Global Edge Network.” Cloudflare’s core business is precisely its Global Edge Network. So, Nvidia needs Cloudflare for AI to function properly, and Cloudflare’s own Global Edge Network can become a significant AI access point in the future.

In practice, Nvidia and Cloudflare are now building the infrastructure for the breakthrough of AI applications. Earlier, I only talked about two companies, and I’m by no means ruling out others. For me, it’s enough to see the significance of their cooperation as interesting and value-creating.

A few words about Cloudflare’s role in the cyber world. I recently listened to a podcast that delved into Cloudflare’s origins. It went something like this: Matthew Prince and Michelle Zatlyn were in the same classes at Harvard. They did coursework together and thus got to know each other. Matthew’s hobby was identifying spam. Then, one time, he was speaking at MIT, and entrepreneurs started asking why they don’t also block spam if they can identify it. That’s how Cloudflare started in 2009, with Matthew and Michelle as founders, others involved, and they raised $2 million in VC funding. So, Cloudflare has always been a cyber company. It’s worth following Matthew on Twitter; he interprets a lot of current affairs very well there, and there are constant updates on their business development. As a small detail, in June, Matthew tweeted about Accenture winning a big deal where Accenture and Cloudflare will provide cyber protection for federal ICT systems, including laptops and phones.

Cloudflare is, at least to some extent, a disruptive company that constantly pushes into the territory of even big players (AWS, Azure, etc.). From the quarterly reports and conference calls I’ve listened to, it’s become quite clear that the number of Cloudflare’s customers is growing very well at the large end (CAGR +29% or so).

One more thing I want to mention; Cloudflare is a very popular workplace in the US, and approximately 1% of applicants are selected, if I remember correctly. Michelle has been recruiting constantly, as she mentioned in a podcast. They aim to find so-called “unwilling underperformers” who cannot utilize their full potential in their current roles. They don’t compete on salary but pay more once results have been achieved for the company.

So, in summary, Cloudflare offers a fast and secure internet. Yet, it’s a truly interesting case. And it achieves its growth disruptively, in Matthew’s words. The forward-looking P/S is around 55. So, no safety margins will appear in the company’s valuation. I won’t write more about the numbers now; we can examine them after, say, August 5th (Q2).

I can’t better explain where I see the company’s moat. We can then look for it together. I would recommend listening to Yle’s Pörssipäivä discussion on June 30, 2021. In it, Ernst Grönblom lists an interesting set of growth company criteria that he uses. And you can reflect those on this company.

And finally - in winner-takes-all type companies, founders often stay at the helm for a long time when the company expands into a major player and market value balloons. And Matthew and Michelle seem to be exactly the right axis to drive the company forward significantly.

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Thank you very much! Most of what you wrote was new to me. My English is weak, and especially if I have to read challenging investment-related material, it takes a lot of time. :slightly_smiling_face:

On Investing.com, a few months ago, there was an article discussing individual undervalued stocks, and Cloudflare was mentioned there. At that time, the price was perhaps around $80-90, whereas now it’s just under $110. This stock is, or was, if I remember correctly, also in Tuomas’ (from Nordnet) portfolio, and I think it even briefly made its way into Lepikko’s pocket. The guys seemed to buy it based on technical analysis when the price was under $80.

It’s even easier to follow that company now that you’ve explained things so well. :slightly_smiling_face:

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https://cloudflare.net/news/news-details/2021/Cloudflare-Hits-Milestone-in-FedRAMP-Approval-to-Offer-Zero-Trust-Cybersecurity-to-Government-Agencies/default.aspx

I listened a couple of times to Cloudflare’s (NET) CEIO Matthew Prince’s interview at the J.P. Morgan 49th Annual Global Technology, Media and Communications Conference on May 25, 2021. The information in these interviews is difficult to find in official slides. Matthew crystallized his company’s strategy, and I will now try to explain it to you. The link I shared above relates to the Biden administration’s significant investment in cybersecurity. It emerged in the interview that the company has already offered its services to the federal government, mentioning the FBI, NSA, CIA, and the State Department. Now the company is moving towards official status in federal services, to which that link refers.

The disruption is that Cloudflare offers a network without latency and that is secure, and from this network, the physical, varied servers (the company talks about boxes) from many providers are removed – Cloudflare delivers its services programmatically. The company has partnered with Google and Microsoft; the large public cloud service providers and Cloudflare form hybrid clouds. Each has its role. It’s more complicated with Amazon, but that’s for another time. One manifestation of Cloudflare’s disruption is that compliance (GDPR, etc.) is handled programmatically within Cloudflare’s network. That is, they code their cloud so that, for example, Texan data stays within the state of Texas. Currently, GDPR is generally managed through server location. Cloudflare’s model is a significant disruption.

The company’s Gross Margin is 77%. This means they have the ability to operate efficiently, and they have a plan to raise operating profit to 20%. Currently, sales and marketing account for as much as 40% of revenue, leading to losses. The numbers are perfectly fine in my opinion.

Follow the company’s website and listen to the quarterly earnings interviews and other presentation materials there. They provide insight into the company. This writing of mine was just a scratch on the surface. I perceive something truly significant and new in this company that we haven’t seen yet. Just a nuance, but Cloudflare is exactly the company that chose and got NET as its trading symbol :slight_smile:

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If you are interested in Cloudflare, you should read Muji’s (twitter @hhhypergrowth) analyses of the company and its products.

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Picked from the semiconductor group and brought here as well…

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A few thoughts on Cloudflare’s results, which came out on Thursday, August 5th, at around 11 PM.
https://cloudflare.net/news/news-details/2021/Cloudflare-Announces-Second-Quarter-2021-Financial-Results/default.aspx

The slide presentation is also illustrative.

I also listened to the CEO’s webcast.

Revenue growth from Q2 2020 to Q2 2021 was 53%. EV/Sales (TTM) is now 76.44 (!!!). Just by looking at the numbers, it’s hard to justify adding it to a portfolio. But a few highlights from Q2. From interviews and press releases, it’s clear that FedRAMP certification is progressing well. Matthew Prince was quite proud and excited about it on the Q2 earnings call – after all, the federal government is, in the CEO’s words, “the world’s largest buyer of ICT.” And the CEO emphasized that federal purchases are multi-year and not yet included in their H2 estimates. He also mentioned the growing role of integrators (e.g., Accenture) as part of expanding the product portfolio. ESG is important to the company, and various theme weeks (e.g., 0-carbon net, etc.) are part of the company’s program. Regarding the numbers, the company openly states that it is constantly investing significantly in product development and marketing. The company still promises to break even in Q1 2022. When considering the drivers of the stock, I believe that the Q1 2022 break-even and the growth remaining at the 40-50% level are what the markets are watching and expecting. (Disclaimer: information read or listened to from the English presentation, so there may be errors in my interpretations.)

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Thanks @Verneri_Pulkkinen for the recent IndersTV broadcast, which discussed the significance and importance of selling decisions. It’s worth listening to from time to time. Sales considerations are absolutely central with these “dubbed top-expensive” companies, among the leaders in EV/S price is Cloudflare (NET), now with an EV/S (TTM) of 74. On the InvestorsObserver website (free to register), NET’s Fundamental Analysis score is 3/100, meaning 97% are better than NET in this category!!! On the other hand, Long Term Technical gives a position of 97/100, almost the best from this perspective. And forecasts are going down: “Forecast data is based on the 12-month price targets of Wall Street Analysts = $116”, the current price is about $127.

On international forums, you can find columns by top-ranked writers, such as “Why Cloudflare Stock Is Very Dangerous And Priced For Perfection”. Your head will surely spin without your own strategy.

I wrote this because often in the middle of earnings seasons, I ask myself, why do I hold these stocks, justify it! This is not an investment recommendation, but my own thoughts out loud. For Cloudflare, the reason to keep the stock in the portfolio is still the business growing at a 50% annual rate and the ability to adjust earnings through sales and R&D investments. Because NET disrupts legacy infrastructure, it is a company that should not be given up on by accident. I pondered the matter on another forum, and my text clearly shows that the anchor is the sales structure and growth: “Thank’s Mr. XX for this very important and useful article. I liked your analysis - the increasing customer base - very much. I encourage you, if you have time and interest, continue to analyze the quality and growth of NET’s customer base, also in the future. There we can find the ultimatum basement to stay long, or signal’s to plan exit. This is very crusial - I try to avoid not to sell based on stock market fluctuations or not to sell even when momentum changes in the overall stock markets (followed by rising inflation and interest rates etc.). In my strategy these should not be a reason to exit this stock - if NET’s real business still continues well. As we all know, the upside potential of Cloudflare is so visible, so don’t miss it accidentally, and regret later.”

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Here’s a superficial company analysis of Cloudflare if you’re interested:

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It’s good to do business when your vision is sharp and your confidence is in place:
“We want to optimize the scale and intelligence of our network so that Cloudflare is not only the most global network on Earth, but also the most local one,” said Matthew Prince, co-founder and CEO of Cloudflare. “We will continue to invest in bringing our network closer to as many people as possible because we believe in providing security, privacy, and reliability for all. On top of expanding our network, we’ll soon share more on how we are creating the fastest modern network.”
https://cloudflare.net/news/news-details/2021/Cloudflare-Grows-its-Network-By-25-Percent-to-Speed-Up-and-Secure-the-Internet/default.aspx

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I don’t do technical analysis, except for one graph (RSI14) that I look at during major price changes – so the exception proves the rule :). Sellers always run out when RSI14 is around 30. This RSI14 is meaningful to me when there’s no change in the company’s story. Cloudflare takes a hit from time to time; I particularly remember Q1/2021, where even before the earnings release, the stock was hammered down 10% in a day, visible around May 10th. And it was hit so hard that even normal results didn’t immediately perk up the stock. Neither then, nor now, have I observed any signs of the business turning downwards. Quite the opposite.

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I myself seek resilience from Cloudflare for situations requiring it for my portfolio… they have a skilled team
https://twitter.com/jgrahamc/status/1445068309288951820

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$NET has now thoroughly swindled investment banks and investors. The company hasn’t issued any profit warnings, in either direction. But the stock price is like a yo-yo. What we know from the statistics is that soon, 20% of the world’s internet traffic will pass through Cloudflare. I interpret these events to mean that the market wants Cloudflare to be the winner in this race. But why? Because the company brings trust and stability to the internet, through which a large part of the world’s businesses are already conducted.

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The market value is starting to get quite high (for me, it has now become the most valuable company in my portfolio, replacing Palantir) and new ATHs are being broken almost every day lately. Why is it that even though revenue is constantly growing, profit has only deteriorated in the opposite direction every fiscal year? At these prices, the market must be anticipating at least continued rapid revenue growth, but surely profit can also be expected? Has that been baked into the prices?

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The company has promised to break even, or reach zero, in Q1/2022. The company is intentionally in the red; sales, marketing, and product development are eating into the profit. Matthew Prince would say that things are progressing as planned. The price certainly has meme-like characteristics.

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Cloudflare and Fastly are very often discussed together in the wonderland of the internet, so can someone familiar with them tell me if they are direct or partial competitors and what advantage one has over the other, if any?

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Good question. You can find a good number of articles by searching “fastly vs cloudflare” online. I haven’t delved into Fastly, and I have a vague understanding that it can offer a fast, even the fastest, internet, as its name suggests. Cloudflare offers a secure and competitively fast internet. Cybersecurity and speed in one package. The solutions are easy to implement. I don’t compare the companies myself, nor do I consider Fastly, because for some reason, I don’t connect with that company in the same way I do with Cloudflare, whose company culture is excellent and is reflected in the company’s operations, for example, in its theme weeks.

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Regarding Cloudflare, one can now assume the rally will halt. Buyers are running out. Q3 results are out on November 4th. This company cannot be held in a portfolio based on its numbers. Institutions are simply not selling it, not even now. There’s no news, and trading volume is normal. But no one is selling now. I’ve even started to ponder whether, given that a significant portion of the world’s business runs on the internet, fast and secure internet is considered more valuable by Wall Street today than it was 11 days ago when Facebook disappeared from the internet. Was that some kind of wake-up call that started to benefit $NET? We are now at some kind of turning point for Cloudflare; perhaps Wall Street is now voting that The Winner ($NET) Takes It All. Very interesting.

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It is certain that fast and secure internet will gradually become a more valuable asset (especially the security aspect, or perhaps I would use the word reliability), but since, for example, the Facebook incident, to my understanding, was not related to Cloudflare in any way other than that they were alert and wrote a very competent blog post about it, I somehow don’t believe that this jump in valuation is sustainable in any way. Instead, I think it’s due to a large amount of money being directed towards companies whose operations are related to network reliability and security. This is supported, in my opinion, by the fact that there is practically nothing visible in the share price curve on August 20th when it was reported that Cloudflare had successfully thwarted the largest DDoS attack ever recorded “earlier in the summer” (the company’s own blog post). Of course, that was somewhat old news at that point, and the situation at the time of the event did not cause any dramatic effects, so in a way, it was perhaps invisible to those unfamiliar with the matter.

Let’s take another slightly different approach: Since Cloudflare’s work is such that it’s practically impossible to understand it deeper than the surface without IT expertise, the vast majority of investments are “blind,” and in that sense, this jump is completely logical. However, I haven’t examined the behavior of comparable companies’ stock prices. The aforementioned Fastly has also been on the rise since October 5th, but there’s no jump visible there - on the other hand, the trend is so heavily downwards that perhaps speculative money hasn’t been directed towards it in larger quantities for that reason. But this perspective doesn’t support a permanent increase in valuation either. I could imagine the first somewhat negative or at least reality-awakening news (e.g., the Q3 results perhaps) letting the air out of the valuation.

Disclaimer: I do not actively follow the company and am not an owner, but I do follow IT and cybersecurity events quite actively.

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