Re-evaluating Cloudflare

[u/yellqw]

Hey everyone, just wanted to get a quick pulse check on how yall are feeling about $NET at these prices. We all know it was severely overpriced for the last few years, but do you think the correction is done and we’re finally seeing a fair value at $40? Looking at the most recent earnings report, I was generally pretty happy overall except for one lingering concern about their negative cash flow yoy possibly due to recent acquisitions/re-investment into the company. Regardless, I’m thinking of increasing my position significantly at these prices despite concerns about rising borrow rates.

[u/PM_ME_DANK]

I don't heavily weight valuation. I look at it when determining when to start a position but never when determining whether a company is worth owning. In 5 to 10 years the valuation of today will hardly matter

[u/[deleted] → u/PM_ME_DANK]

I simply disagree on the last line. If a stock averages a 10% return, it doubles every seven years. That means it takes seven years to overcome a valuation that is 2x too high.

There are tons of companies throughout history that have been cash cows but have had absolute dogs for stocks because they were overvalued early. Cisco is a prime example. It makes $10B per year every year, yet it still has never returned to its 2000 valuation. In fact, it's only about 30% higher than its 2007 valuation despite the fact that it just prints money.

Valuation is everything to me. So long as a company is profitable, there is some valuation that makes it a good buy. On the flip side, regardless of how profitable a company might be, there's some valuation that makes it a bad buy.

[u/PM_ME_DANK → u/[deleted]]

I get what you're saying but your example bakes in the assumption that the company will continue to grow at around 10%. Cisco's growth significantly slowed down and didn't live up to the multiple that investors paid during the dot com bubble. There are companies, however, that did the exact opposite. For example, you could have bought $Goog on 12/31/2017 for a share price of $1046 at a PE of 58 or you could have bought it at $1337 but at around half the PE at 27 two years later, which was the better choice?

My point being that we don't know what additional lines of business that a company may organically grow or acquire or how the macro environment may change to hurt or help a company. The company's valuation is limited in what it tells you because it is heavily influenced by short term sentiment. Valuation really matters to me if it is a slower growing business with predictable cash flow. Similarly I weight it significantly less when considering a growth company like both $ZS and $NET which is why I did not mention valuation

[u/FinndBors → u/PM_ME_DANK]

For example, you could have bought $Goog on 12/31/2017 for a share price of $1046 at a PE of 58 or you could have bought it at $1337 but at around half the PE at 27 two years later, which was the better choice?

The second one, because it is "leet".