Is this hot cloud name a buy?
- Luke Donay
- Oct 21, 2021
- 5 min read
It’s time to explore another cloud company. Here is the break down on $NET, otherwise known as Cloudflare.
Current Price: $182.00
52/Wk High: $183.80
52/Wk Low: $50.54
Market Cap: $56.9 Billion
3 Month Performance: 59.97%
Read below for the break down!
Cloudflare ( $NET ) is a major cloud services provider that delivers a vast array of digital services to companies of all sizes through a massive network that spans more than 250 cities, over 100 countries, and 20 million internet properties.
At the heart of Cloudflare is a company with the goal of “building a better internet” and a large suite of services that strengthens the internet not only in performance and reliability but security.
Exploring Cloudflare’s offerings the company offers customers Application Services, Zero Trust Services, Developer Services, and Network Services all under the umbrella of the Cloudflare network.
Expanding on Cloudflare’s solutions, the company’s products tend to target various industries including eCommerce, SaaS, gaming, media, entertainment, public sector, and government industries.
Exploring Cloudflare’s customer base the company maintains a significant list of clients including HubSpot, Thomson Reuters, LendingTree, Shopify, Axios, SoFi, and over 126,000 paying customers as of Q2 2021.
The company is led by Chief Executive Officer (CEO) and Chairman Matthew Prince, who took over leadership at Cloudflare in 2009. Prince boasts previous experience from the likes of Unspam Technologies, which he co-founded years ago.
Behind Matthew Prince is a management team boasting a wealth of wisdom with prior experience from the likes of Symantec, Brightstar, and a presidential cabinet. It is important to note that multiple team members are veterans, and have been with the company since near inception.
In recent news, Cloudflare in August announced an upsized private offering of $1.125 billion in 0% convertible senior notes due 2026.
According to leadership, the offering will result in $1.1 billion in net proceeds that will go towards general corporate purposes, capital expenditures, potential acquisitions, “strategic” transactions, and working capital.
Furthermore, Cloudflare most recently announced a collaboration with Microsoft and major search engines that will boost search result performance.
Through the IndexNow.Org initiative, the company will allow websites to instantly and automatically notify search engines when content is updated, deleted, or created.
Leadership was upbeat on the new initiative and you can read more on the initiative through the link below.
Digging into the numbers Cloudflare beat Q2 2021 expectations with an EPS of $-0.02, better than the analyst’s EPS consensus estimate of $-0.04. On a year-over-year basis, EPS improved by 33.33%.
Shifting into revenue, Cloudflare reported $152.4 million in Q2 2021 revenue, representing a strong 53% improvement year-over-year. Do note, Q2 2020 revenue totaled $99.721 million.
Alongside EPS and revenue, gross profit continued to expand on both a GAAP and non-GAAP basis. Cloudflare reported a Q2 2021 GAAP gross profit of $117.4 million and non-GAAP gross profit of $118.4 million, both of which are respectively higher than the Q2 2020 levels of $75.557 million and $76.586 million.
Coupled with gross profit, gross margins improved as well in Q2 with Cloudflare reporting a GAAP gross margin of 77% and non-GAAP gross margin of 78%, both of which are higher than their same time 2020 levels of 75.8% and 76.8%.
Touching on operating margins Cloudflare reported a GAAP operating margin of -18.9% and non-GAAP operating margin of -2.6% throughout Q2, both of which represent improvements over their Q2 2020 comparables of -24.8% and -9.5%.
While revenue, profit, and margins continued to improve Cloudflare reported an expanding operating loss and net loss. The company reported a Q2 2021 operating loss of $28.9 million, representing a larger operating loss than the same time 2020 operating loss of $24.7 million.
Furthermore, Cloudflare continued to run a net loss of $35.5 million, which when compared to the Q2 2020 net loss of $26.1 million, represents a significant expansion in net loss.
Rotating into cash flows Cloudflare reported an improved free cash flow (FCF) level of $-9.8 million, representing 6% of revenue. While FCF was negative, the Q2 2021 result represents an improvement over the same time 2020 FCF level of $-20.2 million.
Rounding out free cash flow metrics the company reported a Q2 2021 free cash flow margin of -6%, representing a sizable improvement over the Q2 2020 level of -20%.
Shifting into the customer front Cloudflare reported a whopping 126,735 paying customers at the end of Q2, representing 32% paying customer count growth year-over-year. The metric also marked the 8th straight quarter of customer count growth for the company.
Exploring the company’s customer base Cloudflare reported 1,088 customers producing over $100,000 in annualized revenue at the end of Q2, representing 71% expansion throughout the customer metric.
Finally, Cloudflare reported an improving dollar-based net retention rate of 124%, representing a sizable improvement over the same time 2020 level of 115% and small improvement over the Q1 2021 level of 123%.
Leadership was upbeat about the quarter.
“We had our strongest quarter ever as a public company, and our revenue growth continued to accelerate, growing 53%
year-over-year,” CEO Matthew Prince said.
Looking to the future leadership is bullish, expecting Q3 revenues to land within a range of $165 million to $166 million. The company also expects a Q3 non-GAAP loss from operations of $9.5 million to $8.5 million.
Guiding to the full year, management believes FY 2021 revenue will land within a range of $629 million to $633 million and that the company will run a non-GAAP loss from operations of $28 million to $24 million.
On a final earnings note, Cloudflare recently announced that third-quarter 2021 results will be released to the public after market close on Thursday, November 4th, with an investor call following at 5 PM eastern time.
Shifting into the balance sheet the numbers are solid.
Total Debt: $401 Million
Total Liabilities: $645 Million
Total Assets: $1.446 Billion
Cash & Cash Equivalents: $1.034 Billion
Analyzing the balance sheet Cloudflare experienced an increase in total assets from $1.364 billion, an increase in total liabilities from $528 million, and a decrease in cash and short-term investments year-over-year from $1.072 billion.
On a valuation basis, Cloudflare does trade at a premium.
Price to Sales: 105.63
Price to Book: 70.0x
Management could be more effective going forward.
Return on Equity: -16.61%
Return on Assets: -9.68%
Return on Invested Capital: -10.93%
Given the numbers, the analysts are mostly bearish after a major run with a mean price target of $139.70/share, representing a sizable -23.24% downside.
The high price target is $200.00/share, representing a 9.89% gain, while the low price target is $117.00/share, representing a -35.71% downside.
The big money is quite involved with 82.73% of Cloudflare being owned by institutions. Top holders include Baillie Gifford & Co., Fidelity Management & Research, and Morgan Stanley Investment Management.
On a technical basis, Cloudflare has been on the move. According to the six-month charts, the MACD is moving with significant upside momentum within a range of 13.96 down to 9.57.
The six-month charts are also indicating an RSI of 76.53 and CCI of 120.59, both of which are on the high end.
Exploring investor sentiment the bears point to a stretched valuation, sizable competitors, and increasing debt levels as indicators of downside.
Meanwhile, the bulls believe Cloudflare’s cutting-edge network and platform, reliable management team, and expanding TAM are indicators of future growth.
In short, Cloudflare ( $NET ) is a solid cloud company with over eight straight quarters of revenue, gross profit, and customer count growth coupled with a reliable management team, solid balance sheet, and expanding digital world.
EAT - SLEEP - PROFIT
Disclaimer: This is not direct financial advice, simply an opinion based on independent research.
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