Cloudflare: Consolidating Before It Bottoms Out – Buy While You Can

Cloudflare: Consolidating Before It Bottoms Out - Buy While You Can

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Cloudflare, Inc. (NYSE: NET ) stock overtook Snowflake Inc. ( SNOW ) stock as the most expensive stock in our high-growth SaaS comps set recently. Snowflake investors bailed out alarmingly as the data warehousing leader reported robust earnings results, but “disappointed” with its guidance. But, of course, investors were expecting even more, given Snowflake’s high-multiples valuation.

Meanwhile, NET has continued to demonstrate tremendous resilience despite its “expensive” valuation. Early Cloudflare investors should recall how the company has scaled its TAM from $32B in 2018 to a 2024 estimate of $100B. Therefore, the company has consistently been innovating effectively. Furthermore, its rapid topline growth rates also validated investors’ confidence in its business model.

We are early Cloudflare investors and have continued to retain our firm conviction in CEO and Co-Founder Matthew Prince & Team. Nonetheless, we have taken the opportunity to pare down exposure in November. Despite that, NET stock is still one of our most significant holdings.

We discuss why investors should consider adding exposure before it potentially bottoms out from its consolidation. NET Stock Metrics

NET EV/NTM Revenue valuation (TIKR) Readers can observe that SNOW stock was valued well above NET stock for most of 2021. However, that started to change in November 2021 as Cloudflare stock staged a massive momentum spike. However, we also noticed the appearance of a potential bull trap, and we cautioned against buying .

Notably, the stock then went on a massive de-rating, along with the rest of its high-growth SaaS peers. Furthermore, the tech bear market also pummeled NET stock, as it’s trading 52% below its November highs. Where Is Cloudflare Heading In 2022?

Some investors have cautioned against buying NET stock, given its expensive-looking multiple. We also highlighted earlier that it’s the most expensive SaaS stock in our comps set.

However, it’s crucial for investors to note that NET stock has reverted to its NTM revenue mean since its listing in 2019. As a result, it’s trading at an NTM revenue multiple of 32.6x, against its mean of 34.9x. Nevertheless, it’s still trading well above the median multiple of its high-growth peers of 12.2x. Therefore, we must emphasize that Cloudflare stock is only suitable for investors with a high conviction on its growth and execution. Otherwise, investors should avoid such stocks as their premium multiple could potentially lead to significant value compression.

Nonetheless, we highlighted in a previous article detailing the company’s robust FQ4 report. We were impressed with its highly scalable hardware stack and its ability to keep on innovating. Furthermore, the company has also expanded its security suite, focusing on zero-trust services. Therefore, the company’s ability to leverage multiple secular growth drivers is breathtaking. It indeed demonstrated the versatility and scale of its business model and technology. Furthermore, the company emphasized that the pandemic tailwinds didn’t contribute meaningfully to its organic growth. CFO Thomas Seifert articulated (edited): I think it’s a misconception that COVID was a significant tailwind to Cloudflare . It actually started out as a significant headwind. When COVID happened and traffic spiked, traffic went up by 60% affecting our subscription business model. So, we were not able to pass on that explosion in our costs. Therefore, it was really basic organic growth. COVID might have accelerated enterprises digitalizing their business models, which certainly helped. Last year was the first year in a row where we grew north of 50%. ( Morgan Stanley TMT Conference 2022 ) Furthermore, the company also just announced that it had deepened its partnership with CrowdStrike ( CRWD ) on zero-trust security. Zero trust will be one of its focuses in 2022, as the US government and more corporations embark on the zero-trust journey. The Russia-Ukraine conflict has also underscored the critical importance of embracing a zero-trust security posture. Therefore, Cloudflare can leverage these tailwinds to drive further growth.

The partnership with CrowdStrike is a significant one. We have covered CrowdStrike extensively, explaining its “best-in-class” endpoint security leadership. Therefore, integrating CrowdStrike’s zero-trust assessment (ZTA) adds its endpoint security capability to Cloudflare’s zero-trust framework. CrowdStrike CTO Michael Sentonas highlighted (edited): The CrowdStrike Falcon platform secures customers through verified access controls, helping customers reduce their attack surface and simplify, empower and accelerate their Zero Trust journey. By expanding our partnership with Cloudflare, we are making it easier for joint customers to strengthen their Zero Trust security posture across all endpoints and their entire corporate network. – Cloudflare It isn’t Cloudflare’s first partnership with CrowdStrike. Moreover, it’s also part of the CrowdXDR Alliance […]

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