Bouncer for the Digital Age

Cloudflare.

Founded in 2009, Cloudflare has established itself as a global cloud services security leader. The company aims to improve internet-connected applications' performance and reliability. Cloudflare operates in the internet infrastructure and cybersecurity industry, its mission is to help build a better internet. Cloudflare operates globally serving businesses of all sizes in over 120 countries, by abstracting complex network management tasks into a unified cloud platform. With a global footprint, Cloudflare operates the world's largest secure edge network, bringing 95% of the internet-connected population within 50ms latency

Cloudflare’s strategic vision revolves around becoming the default global platform for networking, security, and developer tools. The company has recently posted a strong 28% YoY revenue growth with a major increase in large customers that generate more than $100,000 in ARR. Cloudflare has recently acquired BastionZero to expand its infrastructure access capabilities and its recent product innovation that simplifies multi-cloud and hybrid deployments. Cloudflare estimates its TAM to reach $225 billion by 2027, from the increased demand for cloud security, developer services, and Zero Trust solutions.

Cloudflare benefits from industry tailwinds as businesses embarrass the digital transformation, cybersecurity, and cloud networking demands are soaring. The company has a strong recurring revenue model that ensures predictable cash flows, along with an impressive retention rate. Its integrated, serverless global platform provides it with significant operational advantages and solutions over competitors. Cloudflare has built a strong moat around them as every customer interaction strengthens its machine learning models, making its solutions increasingly intelligent and effective over time. 

Cloudflare’s ability to innovate, scale, and disrupt players makes it a compelling subject to analyze. Cloudflare is at the forefront of the security and edge computing revolution. The company’s offerings are critical for businesses, making it less prone to budget cuts during economic downturns. Cloudflare is likely to challenge current giants like Akama and Palo Alto networks by offering a unified solution that eliminates vendor sprawl. With revenue above $1.5 billion in 2024 and gross margins consistently above 70%, Cloudflare has achieved a balance of growth and operational discipline. 

Cloudflare has been able to post strong financials in 2024, in its most recent Q3 2024 report it produced revenues of $430 million, a 27% jump YoY. In the first nine months of 2024, Cloudflare reported a powerful revenue of $1.21 billion, proving that its recurring revenue model and demand for its cyber-cloud networking solutions are soaring. Even though the company is not yet profitable, they are losing less money each quarter with a net loss of $15.3 million in its most recent quarter. Cloudflare is making moves on its efficiency, with a gross margin of 77% whos its ability to improve its operational efficiency. This disciplined approach means Cloudflare can invest in innovation and expansion without constantly raising more money. 

Cloudflare is one of the most expensive stocks in the cybersecurity market, with an EV/EBITDA multiple of 54x and a Price-to-Sales ratio of 19x both of which are significantly higher than the company’s major competitors. Investors are betting on Cloudflare's continued and future growth, but if the company fumbles the profitability bag the stock could take a major hit. Its platform is designed to be fast, scalable, and easy to integrate which is why they are rapidly attracting large enterprise customers. Cloudflare's premium valuation is backed by its rapid expansion, cutting-edge technology, and massive TAP (Total Addressable Problem, we the bad boys support TAP over TAM)  the company is chasing. 

Cloudflare has been able to improve its cash flow, with it rising to $103 million and free cash flow hitting $108 million in the first nine months of 2024. This is a huge shift the Cloudflare, proving they can scale without burning cash which helps reduce reliance on debt and extern funding needs. Cloudflare has a huge cash pile of $1.82 million in total liquidity, along with a convertible debt note of $1.29 billion due in 2026 with 0% interest. With the company’s strong cash flow generation they are well positioned to become a profitable tech giant, dominating the future of cybersecurity and cloud networking. 

Cloudflare sits at the intersection of cybersecurity, cloud computing, and edge computing making it a key player in a $222 Billion TAM. The company competes in high-growth segments that include DDoS protection, Zero Trust security, cloud networking, and developer services. Cloudflare is positioned as a leader in the next generation of internet infrastructure. Unlike legacy players that rely on traditional and data center-based models, Cloudflare is fully cloud-based which enables them to deliver security, performance, and reliability as a service. 

At the center of Cloudflares growth are two main products, Cloudflare Zero Trust and Cloudflare Workers. Zero Trust is a rapidly growing security framework that eliminates the old-school model of cybersecurity. With the massive shift to remote work and hybrid cloud environments, Zero Trust security suite is becoming a must-have for enterprises looking to replace their traditional VPNs and firewalls. Cloudflare Workers is the company’s serverless computing platform, enabling developers to run applications at the edge closer to users which reduces latency and boosts performance. This product competes directly with AWS Lambda, with faster response times, lower costs, and deeper network integration. Both of these products drive serious revenue growth and customer expansion, leading to higher revenue per user and long-term contracts. 

Cloudflare competes with several massive players within several segments of its business including Zscaler, Palo Alto Networks, Amazon AWS Lambda, and Fortinet. All of these provide Zero Trust and network security solutions, however, Cloudflare differentiates itself with its global, unified edge network which allows it to integrate security, performance, and developer tools into one platform. In content delivery and networking, Cloudflare competes directly with Akami and is faster but Cloudflare network is faster, more efficient, and less reliant on legacy infrastructure. Despite strong competition, Cloudflare's market share is increasing as it now powers about 20% of the global web traffic. Cloudflare provides an all-in-one solution that simplifies IT infrastructure, reduces vendor sprawl, and lowers costs.

Cloudflare has built a significant moat that protects them from competitors ensuring long-term dominance. The company’s biggest advantage is its global presence with its software networks spanning over 320 cities in 120 countries. This real-time visibility across the internet is something traditional security partners can’t replicate. This gives Cloudflare’s customers an advantage in DDoS mitigation, Zero Trust security, and API protection. Lastly, as Cloudflare continues to expand its enterprise presence and innovate at its current pace will solidify its position as a dominant force. 

Cloudflare has historically focused on organic growth, driven by its product launches, enterprise penetration, and aggressive innovation pipeline. The company’s main products Cloudflare Workers and Zero Trust offer major growth opportunities as they are set to replace traditional VPNs, and firewalls with cloud-native controls. The company’s Magic Cloud Networking solution makes multi-cloud and hybrid-cloud environments easier to manage, a critical need to reduce reliance on single-cloud providers. Cloudflare has been winning major contracts with Fortune 500 companies, increasing its $100k+ enterprise base by 28% YoY. Another major driver is its Data Localization Suite which helps businesses comply with regional data regulations like GDPR and China’s cybersecurity laws, this makes Cloudflare services more attractive to multinational corporations who navigate complex compliance landscapes. 

Cloudflare has historically focused on its organic growth, but strategic acquisitions and partnerships have played a role in strengthening its security, networking, and AI capabilities. Recently in 2024, Cloudflare acquired BastionZero which expands its Zero Trust infrastructure access capabilities. This acquisition aligns with the company’s push into securing developer alignments, an area gaining importance as companies seek to protect cloud-based workloads and code repositories from cyber threats. Previously, Cloudflare has acquired S2 Systems, Zaraz, Area 1 Security, and Neumob to help the company tap into new revenue streams by embedding its technology into large ecosystems that will further strengthen its enterprise expansion strategy. 

One of the biggest tailwinds that could supercharge Cloudflare’s expansion, is the continued adoption of AI-driven cybersecurity and automation. The rise of AI-powered cyberattacks means businesses need real-time threat mitigation which Cloudflare is positioned to handle. Another growth catalyst is its supply chain optimization and operational efficiencies, Cloudflare recently expanded its data center partnerships to improve global coverage and reduce infrastructure costs. Cloudflare has begun focusing on creating consistent cash flows which will reduce the need for external capital fundraising to position themselves for long-term sustainable growth. 

Cloudflare operates in one of the fastest growing technology sectors with a TAM expected to reach over $250 billion by 2023. This massive sector includes segments like Zero Trust Security, serverless computing, cloud networking, and DDoS protection. This presents major opportunities for Cloudflare to expand into emerging markets like Latin America, the Middle East, and Asia-Pacific where demand for cloud security solutions is rapidly rising. Another long-term trend that is favorable for the growth of Cloudflare is the shift away from hardware-based security to cloud solutions as many enterprises are ditching legacy firewalls for software-defined security. 

As a global organization, Cloudflare faces operational risks that include scaling, infrastructure, and execution-based challenges. As Cloudflare continues its rapid expansion, operational risks could become major risks that include scaling its global network efficiently. Cloudflare operates over 320 data centers in 120+ countries, maintaining and expanding these will require significant capital investments. Any delays in expanding network capacity or inefficiencies in data center deployment could impact service quality and customer satisfaction. Another major operational risk for Cloudflare is its ability to attract and maintain talent, especially in a highly specialized area like cybersecurity and cloud networking where the demand for top-tier engineers is skyrocketing. 

The cyber security and cloud networking industries are highly regulated, making Cloudflare highly vulnerable to increased government scrutiny. Data privacy laws, national security concerns, and compliance requirements can create complex operational hurdles. Competition is another major market risk for Cloudflare as they go head to head with other deep-pocketed tech giants like Amazon AWS, Google Cloud, Microsoft Azure, and Palo Alto Networks. Also, Cloudflare could struggle to maintain its high growth due to the low switching costs in cloud security and networking. Although it's unlikely, businesses could cut spending on digital transformation and cybersecurity projects which could damage the company’s growth. 

One of the biggest risks for investors is Cloudflare's expensive valuation, far higher than most cybersecurity and cloud networking peers. While Cloudflare has been able to justify its premium valuation with its major growth, any missed revenue targets, margin compressions, or economic downturns could lead to a major stock price correction. Stock-based compensation is another risk that Cloudflare faces, like many tech companies they rely heavily on stock grants to attract top talent. In its most recent quarterly report, Cloudflare reported $253 million in SBC if this trend continues to rise Cloudflare's EPS could be suppressed leading to investor concerns. 

Cloudflare is one of the fastest-growing companies in the cloud networking and cybersecurity sector, with a strong product suite and a massive TAM. The company’s Zero Trust solutions and serverless computing platforms have become critical infrastructure for businesses as they undergo digital transformation. The company executes at a high level by delivering increased revenue, and profitability metrics, and its strong balance sheet gives the company room for future acquisitions and continued R&D investments while it scales operations. Cloudflare's ability to integrate security, networking, and developer services into a single platform gives it a significant advantage that many legacy firms and providers have struggled to replicate. 

The bad boys over at Azar Capital Group will be giving Cloudflare a ‘BUY’ rating due to its leadership in Zero Trust security, strong growth, and expanding free cash flow. In the long term, there are several growth catalysts that investors should watch including the increased enterprise adoption, AI computing expansion, regulatory tailwinds, and its continued path to profitability. Cloudflare has continued to expand its growth into $100k contract customers with its expansion into Fortune 500 companies as well as public sector deals. With the Zero Trust adoption mandates from governments and strategic partnerships with Microsoft, Crowdstrike, and cloud providers Cloudflare is well-positioned for its path to profitability. If the company continues to execute on its growth and moat expansions, Cloudflare has the potential to become one of the most dominant cloud infrastructure companies. 

Disclosure

This analysis is for informational purposes only and should not be considered financial advice. Investors are encouraged to perform their own due diligence or consult with a financial advisor before making investment decisions.