Is Cloudflare Stock a Buy?

From websites to application programming interfaces (APIs) to web applications to private networks from within a business, a safe and secure connection is an absolute must-have. And Cloudflare Inc (NET) is a security specialist that has been making waves.

Intended to sit virtually between a website’s visitor and the customer’s hosting provider, Cloudflare Inc. provides internet security, web infrastructure, content delivery networks (CDN), and distributed denial-of-service (DDoS) mitigation services to users and businesses who rely on a safe and secure internet connection.

The goal of Cloudflare is to protect its customers — and, to an even greater extent, its customers’ customers — from any malevolent activity online. Does that make Cloudflare a good investment? 

 

How Cloudflare Got Started

Founded 12 years ago in 2009, Cloudflare and its reverse proxy services have been trusted by plenty of online businesses big and small — including one in 2014 who, without Cloudflare’s protection, would have been the victim of the largest DDoS attack ever recorded at the time.

In addition to the security the company provides, Cloudflare has several other offerings:

• a VPN service called WARP,
• a suite of authentication products called Teams,
• an application software called Workers, and
• a front end development software called Pages.

All in all, these products and services come together to make Cloudflare one of the most enigmatic firms since it went public in 2019. But what about the company’s financials, and the company’s strategy for the future?

Cloudflare Financials

At the close of the company’s second quarter on June 30th of 2021, Cloudflare proudly boasted its strongest quarter on record as a publicly traded company. Its total revenue for the quarter was $152.4 million, an impressive increase of 53% year-over-year.

Additionally, its GAAP gross profit was $117.4 million, which represents a 77% gross margin — a notable increase over Q2 of 2020’s GAAP gross profit of $75.6 million, or 75.8% gross margin.

At the quarter’s close, Cloudflare’s cash, cash equivalents, and available-for-sale securities totaled over $1 billion.

These financials are clearly quite remarkable, but it’s also worth looking at Cloudflare’s losses and total cash flow. At the end of Q2 2021, Cloudflare’s GAAP loss from operations was $28.9 million (nearly 19% of its total revenue).

This is an improvement over Q2 of 2020, which saw a GAAP loss from operations of $24.7 million, or 24.8% of its total revenue.

Non-GAAP loss from operations, on the other hand, was $4 million — 2.6% of its total revenue and a marked improvement over the $9.5 million/9.5% non-GAAP loss in Q2 of 2020.

Net cash flow was $7.5 million from operating activities, while free cash flow was -$9.8 million, both improvements year-over-year.

NET Earnings Forecast

While these numbers for Cloudflare’s second quarter of 2021 are undoubtedly great for the company and its investors and traders alike, what about the company’s future financials and their projected impact NET share price?

For the third quarter of 2021, Cloudflare expects to see its total revenue to hit somewhere between $165 and $166 million. The company also predicts a non-GAAP loss from operations between $9.5 and $8.5 million, which translates to a non-GAAP net loss per share between $0.04 and $0.03.

For the fiscal year, Cloudflare anticipates a total revenue between $629-633 million and a non-GAAP loss from operations between $28-24 million (or $0.12-0.11 per share).

Analysts anticipate Cloudflare stock to hit $140 per share over the next twelve months, which is only a slight increase over its current price per share of around $130.

A discounted cash flow analysis forecast pegs the intrinsic value of NET share price at closer to $125 per share.

Record Breaking Customer Growth

Even though financials play an enormous role in whether or not a company’s stock is worth purchasing or not, it’s also important to consider the company’s goals — after all, the way a company plans to move forward tends to have a direct impact on the company’s stock.

One of the most significant strategic aims for Cloudflare is to mushroom its customer base. Cloudflare increased its customer growth by 140 in Q2 2021, bringing its total number of customers to 1,088. This is a record number of new additions for the company, and a record Cloudflare surely is on track to break in subsequent quarters.

Who Is Cloudflare’s Competition?

There’s no doubt Cloudflare is one of the most sought-after names in the CDN industry, but what about the other names? Do any of them pose a threat to Cloudflare? And what does Cloudflare do to keep its customers from looking elsewhere?

For starters, Cloudflare is presently the most popular and most used CDN on the market — far surpassing the competition like Amazon CloudFront and Fastly (FSLY).

This is in part credited to Cloudflare’s offering of a free plan, which makes it easy to onboard businesses and websites just getting started. Once embedded in their ecosystems, businesses are less likely to overcome the friction to choose a competitor.

The Bottom Line: Is Cloudflare Stock A Buy?

Cloudflare is quite obviously a titan of the web security and performance industry. From the world class protection it provides to its suite of performance-enhancing tools like CDN and DDoS mitigation, Cloudflare’s promising financials and its impressive dominance over the competition make it an understandably popular share among investors.

Going forward, as internet security continues to become more and more important to businesses making the switch from in-store to online offerings in the wake of the COVID-19 pandemic, it seems safe to assume Cloudflare will only continue to grow increasingly popular as a result. In turn, this will help Cloudflare meet (or even exceed) its financial and operational goals and further propel the company to new heights.

Taking all this into consideration — Cloudflare’s financials, forecast, and business practices — it’s fairly safe to say that the answer to the question “Is Cloudflare stock a buy?” is a resounding yes.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.