Cloudflare. Know it? Of course you do, it’s the gateway to a lot of companies who have chosen it as their preferred cybersecurity detection partner. The company has clearly been doing a lot right. Medium, Discord, Fiverr and Udemy all have chosen Cloudflare. And the firm’s reputation has translated to enormous revenues, which have grown rapidly over the past 6 years:
- 2017: 59.1%
- 2018: 42.8%
- 2019: 49.0%
- 2020: 50.2%
- 2021: 52.3%
- 2022: 48.6%
Perhaps the most surprising aspect of that revenue growth is how consistent it is in entirely different markets. The 2020-21 period was hijacked by the pandemic while 2022 was a bear market. The prior years of 2017-2019 were a boon period for the economy with low interest rates and a rising stock market. In spite of economic turbulence during this period, the top line remained remarkably consistent between 40-50% generally.
- Cloudflare’s revenue has grown at an average annual rate of 50% over the past 6 years.
- Based on a valuation analysis, the company’s intrinsic price per share is $49, which is 15% higher than current levels.
- If the stock price falls to $30 per share, it would be a good investment for investors with a reasonable margin of safety.
Is Cloudflare a Buy?
Revenues are one thing but margins and profits are quite another. On the gross margin front, Cloudflare rivals any of the great tech companies with margins consistently hovering around 77%. Profitability isn’t so impressive. Indeed, management has posted losses just about every year. Worse still, operating income has grown from close to $10 million in 2017 to almost $200 million last year.
The company has also grown its long-term debt from $383 million in 2020 to $1.4 billion in 2022 while cash has fallen from $313 million in 2021 to $204 million last year.
It’s always a conundrum to know when is the right time to buy when a company is posting massive sales increases while also growing losses. Certainly, Wall Street took a shoot now, look later approach by cutting the company’s share price in half over the past twelve months. The question is whether now is a good time to buy.
We ran the numbers to answer that question and the only valuation metric we could identify that would suggest the company was undervalued was on Revenue Multiples, which suggested a fair price of $63 per share. Overall our analysis revealed the company is overvalued by about 15% with an intrinsic price per share of $49.
We’re big fans of Cloudflare’s product, its ability to protect against DDoS attacks and block cyberattacks, as well as management’s ability to acquire customers but investors have bid up the stock too far in our view, even after a 50% haircut over the past year.
Is this a company to buy after a selloff and on the dip? Yes, we think so. But we would want to see the share price much lower, closer to the $30 per share level before scooping it up.
With that said, if sales accelerate and earnings come in positive with an eye on consistently growing profits for the foreseeable future, we see a path toward much higher price levels. For now, though, the evidence does not support a higher current share price.