Cloudflare, Inc.

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

Cloudflare is a global cloud services provider that delivers a broad range of services to businesses of all sizes, making them more secure, enhancing their online performance, and simplifying network management.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview Cloudflare operates a global network that provides a range of cloud services aimed at enhancing the performance, security, and reliability of its customers’ internet properties. These services include:

  • Content Delivery Network (CDN): Caching content closer to end-users for faster delivery and reduced latency.
  • Security: Protecting websites and applications from DDoS attacks, bot activity, and other threats.
  • DNS Services: Providing faster and more reliable domain name resolution.
  • Zero Trust Solutions: Allowing secure access to applications and resources, and that can be customized to fit any type of company.
  • Network Services: Providing the flexibility needed to manage and scale modern networks.

Revenue Distribution Cloudflare’s revenue model is primarily subscription-based, with varying tiers based on the level of service and features. They generate revenue from:

  • Subscription Services: Recurring revenue from a diverse customer base of all sizes, ranging from free plans for individuals to premium packages for large enterprises.
  • Usage-Based Components: Some products, particularly performance and reliability offerings, have usage-based components which allow them to be scaled up or down as needed.
Most of the revenue is recurring, and that means a very high retention of revenues yearly, which is good because it means customers value their product and its pricing.

Trends in the Industry

  • Increased Cybersecurity Threats: Companies are dealing with more cyber attacks than ever before, which increases the need for a company like Cloudflare to protect them.
  • Growing Demand for Speed and Reliability: Users expect seamless, lightning-fast experiences, which demands content delivery networks to be performant.
  • Shift to the Cloud: More and more businesses are moving their infrastructure and applications to the cloud, meaning a larger addressable market for Cloudflare.
  • Edge computing: Companies are demanding that data is processed where it is created, which could create a demand for Cloudflare’s edge servers.

Competitive Landscape

Cloudflare operates in a competitive landscape:

  • CDNs: Akamai, Fastly, and Limelight Networks are major rivals that compete in the CDN space.
  • Security: Large players like Akamai and emerging players in the security space like CrowdStrike offer similar services.
  • Other: Large cloud service providers like AWS, Azure, and GCP provide security, performance, and reliability services as part of their larger infrastructure offerings.

What Makes Cloudflare Different?

  • Unified Platform: Cloudflare combines a broad range of networking, security, and performance services in a unified cloud-based platform, simplifying deployment and management.
  • Global Network: Cloudflare boasts one of the largest global networks, with servers strategically located around the world to improve performance and security.
  • Innovation: Cloudflare has been consistently innovating and creating cutting-edge features and services.
  • Free and Affordable Tiers: It offers free and affordable tiers which makes them more easily accessible to individual users, and small-to-medium businesses.
  • Developer-Friendly Platform: Cloudflare has also given developers tools like Workers, and Pages, to build and deploy applications and websites quickly.

Financials

  • Revenue Growth: Cloudflare has consistently shown substantial revenue growth, driven by the increasing adoption of its platform.
  • Margins: Cloudflare is yet to achieve profitability under GAAP accounting. While it has a high gross margin, operating expenses, especially sales and marketing and R&D expenditures, continue to weigh on the bottom line. However, operating expenses have decreased as percentage of revenues in the recent quarter.
  • Cash Flow: The company has shown a positive trend in improving operating cash flow over the last year, but remains unprofitable due to high levels of sales and marketing expenses.
  • Balance Sheet: Cloudflare has a solid balance sheet with limited debt, and the main portion of its liabilities being the convertible notes. It has more cash and marketable securities than its total liabilities. This allows it to have ample flexibility.

Latest Information

  • Earnings Beat Cloudflare has posted strong results in its most recent earnings, as revenues and profits both exceeded analysts’ estimates.
  • AI Focus: In the company’s latest earnings call, they announced they are putting a greater emphasis on AI, and its integration in Cloudflare’s product line.
  • Enterprise Growth: The enterprise customer growth has been a strong focus, and the results have been promising. The company’s management team is increasingly focused on these large customers.
  • Operating Efficiencies: The company is currently trying to improve operational efficiencies and improve margins, this effort has been promising.
  • Product Development: The company has been working on many new products to provide their existing customers with more offerings.
  • Customer Expansion: The company has stated they see potential for a large expansion in their existing customer-base.

Moat Assessment

Cloudflare’s moat is rated a 3 out of 5, with the following justification:

  • Network Effects (Strong): Cloudflare’s large and growing network creates a powerful network effect, increasing the value of its services to existing and new users.
  • Switching Costs (Moderate): Although it is not difficult to use a single product offered by a competitor, tightly-integrated products within Cloudflare’s platform increases stickiness and thus customer switching costs.
  • Cost Advantages (Moderate): Cloudflare’s cost advantage comes from the ability to leverage existing infrastructure to provide new products and services. However, other large players could also provide similar services.
  • Intangible Assets (Weak): While Cloudflare has a very strong brand name in the security industry, it does not provide it with a pricing premium.

  • Size Advantages (Weak): Although Cloudflare has a large market share, it competes with many larger players.

    Legitimate Risks That Could Harm the Moat

  • Increased Competition: Competitors like AWS, Akamai and Fastly have more experience and resources. They could use this as an advantage over Cloudflare.
  • Technological Obsolescence: The technology landscape can rapidly evolve, and a new technology could displace Cloudflare’s services.
  • Loss of Major Customers: Because the company is still trying to get profitable, if it loses major customers, it would significantly hurt their revenues.
  • Cyberattacks on Cloudflare’s Own Infrastructure: If the company faces major cyberattacks itself, it could severely damage its brand image, and make customers look elsewhere.
  • Regulatory Changes: Regulatory changes on the internet or the digital space could affect Cloudflare’s revenue.

Business Resilience

  • Recurring Revenue: The subscription-based model creates a steady and predictable revenue stream, making the business more resilient to economic downturns.
  • Growing Demand for Cybersecurity: The demand for cybersecurity products and services is only going to increase, so the company will continue to remain relevant.
  • Diversified Customer Base: Having customers of all sizes across many different sectors reduces risk and increases resilience.
  • Continuous Innovation: The ability to launch new products constantly keeps the company relevant and creates an ability to capture future growth.

Understandability Rating: 3 / 5

While the core business of cloud security and performance is understandable, Cloudflare’s large range of products, and its various business segments, can make it a little complex for an outside investor to fully understand. It requires a reasonable level of knowledge of technology and the cybersecurity industry. The fact that its products are very technical and sometimes a bit vague (like “zero-trust” or “network”) makes understanding harder for an average person.

Balance Sheet Health Rating: 4 / 5

Cloudflare maintains a solid balance sheet with a conservative amount of debt and a high amount of cash equivalents and marketable securities to cover it. The company is not currently generating profits, but has very good financial flexibility and a positive trend in its financials, making its balance sheet reasonably healthy.