The future is in the clouds

Brian Withers (NET): The internet is getting more crowded everyday. With more data, more websites, and more users than ever, businesses who want to stand out need to have fast and responsive websites for their customers. Enter Cloudflare and its mission to help build a better internet. The company offers products to provide customers a more secure, more reliable, and high performing website. Not surprisingly, the business is booming.

To end 2020, the company put up 50% year-over-year revenue growth for its fourth quarter and full year revenue growth. As its customers come on board with the serverless cloud products, they tend to grow their spending over time. Dollar based net retention has been 115% or higher for the last eight quarters and customers spending more than $100,000 annually are growing at a torrid pace. 

Metrics

Q4 FY2019

Q3 FY2020

Q4 FY2020

QoQ change

YoY change

Revenue

$84 million

$114 million

$126 million

14%

50%

Customers >$100k annual spend

526

736

828

13%

57%

Dollar based net retention

119%

116%

119%

+3%

-

Data source: Company earnings reports. 

What’s even more impressive is the company’s commitment to innovation. With a series of new products over the last several years it’s able to tackle a much bigger market. In 2018, its addressable market was estimated at $32 billion. But now with the addition of its network and zero trust services, it's opportunity has more than doubled to $72 billion, and is expected to grow to $100 billion by 2024. A recent partnership announcement with Nvidia will enable the company to ride the tailwinds of the artificial intelligence growth trend too.

As with many of the cloud stocks, its valuation is steep at a 51 price-to-sales ratio. But for a company with a history of innovation, a huge and growing market, and proven track record growth this is one stock you’ll be happy you bought a decade from now. If you are nervous about getting in at this lofty valuation, a suggestion would be to buy in thirds. This way you would benefit no matter what the stock does over time. If it dips, you can take advantage of a better price, if it goes up, you’ll be happy you own a few shares. Maybe it’s time you added this cloud specialist to your portfolio?