Should I Buy Cloudflare Stock As A Kick-Off To 2021?

Cloudflare reached new heights in 2020 as the pandemic forced organizations to keep operations running online, but will this year be a repeat?

Jan. 9, 2021

The software company is a type of modern infrastructure, but instead of moving goods, it helps deliver data and services. Cloudflare’s technology does this by passing users’ content to its data centers, which are located globally, to speed up content delivery times and protect its users against cybersecurity threats. 

Within a year, Cloudflare stock has increased by 320%. Putting that into perspective, the company started 2020 with a market capitalization of just over $5 billion, and now, it’s worth over $23 billion. As a result, Cloudflare stock is arguably expensive but it’s worth researching why this disruptive technology company to understand why so many investors are willing to pay such a high premium for it.

The bull case for Cloudflare 

Let’s look at some of the company’s highlights which make Cloudflare stock a good buy: 

  • Cloudflare’s cloud services addressable market is predicted to reach $47 billion by 2024.
  • As of December, the company’s 12-month revenue was $389 million meaning the cloud platform has only captured less than 1% of its potential clients. 
  • Over the last two years, paying customers have grown at a 22% compound annual growth rate (CAGR) to reach over 100,000. 
  • 54% year-over-year revenue growth rate in Q3 2020, with revenue totaling $114 million for the quarter.
  • 48% of its revenue came from outside the U.S., showing investors that its services are valued globally. 

As we’ve seen this year, next-generation edge networking platforms have been in high demand as people and organizations shifted more of their everyday activity online. As a result, Cloudflare’s already high growth rate held steady amid the year’s market volatility and has accelerated since. 

The bear case against Cloudflare 

Cloudflare is most certainly doing something right, but the fact remains it is currently trading for a whopping 64x trailing 12-month sales. The company is also operating at a loss, spending $82.3 million during the first three quarters of 2020. Even though it had a tremendous year, it’s still an expensive stock.

For businesses that deal with cybersecurity, their own security is usually the biggest risk. Any breaches in Cloudflare’s systems will lead to a loss of faith from its customers. If the company was to experience a cyberattack, there are plenty of other companies that clients could turn to as competition in the cloud space is growing. Fastly and ZScaler represent fierce rivals as both also focus on their own strengths in content delivery and security. 

Q3 2020 Earnings

Cloudflare’s mission is to help build a better internet and the company delivered an earnings beat in the third quarter of 2020. Total revenue of $114.2 million, represented an increase of 54% year-over-year. Non-GAAP net loss per share came in at $0.02, compared to $0.16 in the third quarter of 2019.

So, should I buy Cloudflare stock? 

Yes, there are lots of reasons you should buy this stock and hold it long-term. The number one being that Cloudflare already has 3.2 million happy customers, but equally as important it also has only captured less than 1% of its potential market which is very exciting for a rapidly evolving company. 

If you are worried about the competition, you shouldn’t really be as it’s not a single winner race. The cloud service market is huge meaning there’s definitely room for more than one big player in the industry. 

Quickfire Round: 

What is Cloudflare used for? 

Cloudflare is a free CDN type product that protects its users against cybersecurity threats, improves site performance, and speeds up website loading times by using their many data centers which are dotted around the world.

Is Cloudflare faster than Google? 

Yes, Cloudflare is faster than Google and anyone other company for that matter by focusing on performance and independent testing. 

How does Cloudflare make money? 

Cloudflare has four different tiers in pricing plans. A free service and three paid plans including Pro, Business, and Enterprise.

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