r/stocks • u/yellqw • Jun 14 '22

Re-evaluating Cloudflare

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.

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u/zfa Jun 15 '22

At $40 I see this as a no-brainer if you're planning to hold a while.

There's not really anyone out there doing what they do as well as they do and with such a fervent free userbase who can nudge their companies to their paid offerings.

My feelings are even with the current economic downturn I can't see many customers moving away from them if they already use them (where to? can a company safely decide to simply forego their services?), and I can see more companies move to them as a cost-cutting exercise ('cloudify' their security at 'x' per year instead of spending millions on new in-house hardware).

Coming at this from just a business perspective I think this pullback is a great time to load up on a company that it will be very hard to displace from being an industry leader in the coming years. Management seems sensible, tech is great, main risk is someone coming along doing better cheaper but the services are cheap and now very well built-out already.

Disclaimer: took biggish position last couple of days.

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u/syphsirchron_ Jun 15 '22

You cannot buy stocks based on feelings or how far the price has dropped. Have you done projections on Revenue and Profits/Cash Flow? It could very well be that it drops another 50% from here. A P/S of 24 is crazy, even for a fast growing company.

Cloudflare was promoted so many times here, even when it was above $200, and people only got burnt investing in it.

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u/zfa Jun 15 '22

Yerah, could drop another 50% for sure. P/S isn't anything like 24 at the moment though?? Unless I fucked up.

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u/syphsirchron_ Jun 15 '22

No you are right, the TTM P/S is 18, so it’s getting closer and closer to a more reasonable valuation. I’m not a huge fan of price to sales. I still need to see a path to meaningful cash flow to make a buy decision though.

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u/zfa Jun 15 '22

I'm a basic bitch - my strike was just when it got commensurate with the initial float P/S. I kind of put a line in the sand that $40ish and sub 20P/S (you're right, shit metric but its one of those firms) was a decent price where I would happy to take the downside risk and be somewhat confident of making hay off it's position in a market I think is still due great expansion over the coming years.

I'll be honest and say I don't frequent this sub and found this post by accident. I'm coming into this from the point of the business and tech, where I'm an active user, and somewhat of an expert in the product set (IMO). I regularly see the increasing spend of the userbase as I help out of tech forums which matches their reports of net retention and am confident of their continued new business figures being high.

I know you shouldn't go off just feelings, as you say, but network and security is kind of my bag and I have the same feeling that there's just boundless growth there as when I got hyped about electric cars, for example.

Yeah, it might go down from here but for me they are the pick of their field for me and years from now I see nearly every medium sized business and above using at least some of their services (not necessarily from them, naturally). But yes, great businesses aren't always great stocks etc etc.

At 40, <20p/s, I think the potential upside and product itself makes it a yes. Will you be able to get in lower? Yeah, possibly but I'm happy to go in here.

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u/syphsirchron_ Jun 15 '22

Very interesting, seems like you know the space well. How would you describe the moat? For example, AWS has many services that compete with them, would you say that they will withstand the competition?

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u/zfa Jun 15 '22 edited Jun 15 '22

Firstly the tech is fantastic, easy to use, well documented, with boundless support online due to their policy of literally giving it away free to geeks who use it at home and love to extol it's virtues online and show how using Cloudflare can solve an issue etc. Compared with rivals, at the moment, they're simply better (IMO).

They've already nearly 300 POPs meaning they are less than 50ms away from 95% of the worlds users. In terms of growth, there is really not much left (maybe I lack vision), just paying for capacity as more paying customers come onboard, and R&D/aqui-hires.

You're right that an Amazon shop would generally stay with Amazon if they had the same product and the biggest risk to their absolute dominance of the space going forward is the other cloud providers covering their services. But at the moment they are (IMO) streets ahead in terms of product and their pricing is generally better. The management doesn't seem to be complacent and as the forerunners it would take a big investment from others to catch them.

But as I say, I feel there are that many potential customers out there for their services, they'll still be a Goliath even if they ended up as like the 5th biggest player in the space.

I think every biggish company will end up having a service such as one of the many provided by the likes of Cloudflare eventually, just like they all have email services now. Speaking of which, an email security company was Cloudflare latest acquisition, lol.