Should you buy Cloudflare stock?

Cloudflare stock analysis. NET stock.
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If you’re looking for a company with impressive top-line growth, then Cloudflare fits the bill. Its revenue grew from $85m back in 2016 to almost $1.1 billion for the last twelve months. That’s an impressive annual growth of about 50%!

The company is a content delivery network which provides some of the plumbing behind the internet.

When you visit a website that uses Cloudflare, your computer talks to Cloudflare's servers first which then talks to the website's servers. This helps to make websites load faster and also helps to protect your computer from malware and other threats.

The significance of Cloudflare can be seen whenever the service goes down as it takes many of the world’s largest websites with it.

Today, the company has a market cap of 16.6 billion dollars with 1.4 billion of long term debt and 256 million of cash. That gives the company an enterprise value of 17.7 billion.

Revenue over the last 12 months was 1.1 billion, and free cash flow was 59 million. But net income was negative 190 million.

Part of that stems from significant stock-based compensation which comes in at 226 million. But it’s also due to Cloudflare continuing to spend -- on research and development and sales and marketing.

All this means that the company is valued at an incredibly steep 16 times revenue or 300 times free cash flow.

However, as Cloudflare grows these multiples will come down and management believes it can hit $5 billion in revenues by the end of 2027.

Management also thinks it can reduce sales and marketing expenses by 14% over the next few years and SGA costs by 3% and by doing so get to 20% operating margins from just 7% today.

Let’s assume that Cloudflare can hit 5 billion in revenue by 2028 with a 20% operating margin.

That would put operating income at around 1 billion. A 30 times multiple puts the valuation at 30 billion in 5 years time which works out to an investment return of 11% per year.

So as you can see, a great deal of growth is already baked into the share price.

That said, Cloudflare is investing in new products and revenue should be supported by the current boom in artificial intelligence. On the latest earnings call, CEO Matthew Prince said “revenue that’s coming from AI companies have substantial growth north of 20% quarter over quarter”.

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