Edge Computing is the Future, and Cloudflare Has the Edge

Stock (Symbol)

Cloudfare (NET)

Stock Price

$40

Sector

Data is as of

Expected to Report

Company Description

Sharek’s Take

• Years ago, when companies wanted to turn-up a new application, they had to physically buy a new server from a company such as Gateway (with cow packaging).
• Then VMware came and make it so multiple applications could work on a single machine, which gave rise to the first cloud computing providers.
• Next came companies like dotCloud (which became Docker) with containers, which were lighter-weight versions of a virtual machine. Most serverless platforms today are built out of containers (source: NET earnings release).
• Cloudflare utilizes edge computing, which entails placing edge servers all-around the world, with each close to the user. The decrease in distance becomes decrease time, making it quicker for data storage and computations.
• Cloudflare built one of the world’s largest network in 200 cities across 100 countries to store data and stop attacks for its clients, while keeping things flowing swiftly online.
• Cloudflare’s servers allow shift customers and traffic across its network efficiently so product developers and customers do not need to worry about the underlying servers. It load balances to different cities, then to locations, then to servers, etc. to get the best speed.
• Then, Cloudflare’s firewall is similar to Zscaler’s in that it’s integrated to protect your business applications from malicious attacks. Here’s an article on Cloudflare’s Magic Firewall. Note: this is cybersecurity for the traffic, not the end-point (phone, computer, etc), so you also might need a company like CrowdStrike for end-point protection.
• As a side note, inside NET’s new generation of servers (10th) there’s no Intel inside, as management was impressed with 2nd Gen AMD EPYC processors.

I believe edge computing is the next-big thing in technology, as it makes computing so much faster because of the shorter travel distance. Cloudflare has an “edge” in this space as its had an edge computing offering in the market for nearly 3 years and it offers different services, so companies can get everything from one vendor (and train employees just one system). Cloudflare for Teams is hot right now as it helps companies assist with employees working from home, and Cloudflare Workers allows programmers to deploy code that runs seamlessly across the world.

Cloudflare works with 16% of the Fortune 1000 (up from 13% last qtr). Competitors include Akami, Amazon, and Microsoft but Cloudflare continues to work with all these companies as some clients want to work with multiple vendors. Predictable bills like Cloudflare provides are also important, and competitors often send surprise large-usage bills to other customers. Cloudflare is as much as 75% less expensive than the AWS Lambda security software (which uses containers that take time to load). Here are some highlights from last qtr, with percentage growth year-over-year:

• Revenue up 48%. Profits of -$0.03.
• Grew customer count — free and paid — by 40% year-over-year to more than 3 million.
• Added 7000 paying customers to bring the count to 96,000.
• Added 80 $100,000+ a year customers to bring the total to 637, up 65%.
• Blocked 37% more cyberattacks to the same customers than it did a qtr ago. Including new customers, growth in mitigated attacks was 63%.
• June saw an attack against one of its customers that lasted 4 days and peaked at more than 750 million
  packets per second. Cloudflare says its network didn’t flinch.
• The company had 257 new team members, increasing headcount by 44% to 1535. Cloudflare received 47,000 applicants, and extended offers to 0.6% of applicants. 96% of offers were accepted.

Cloudflare is a recent IPO with less than a year of trading history. The company isn’t making a profit, and profits aren’t even on the horizon. There is not an Estimated Long Term Growth Rate either. But big investors have been taking positions. I’ve been following NET a lot on the news, and I think this is the best cybersecurity stock to own. And on the file storage side of the business, edge computing is growing so rapidly in popularity that other cybersecurity companies may — or will — be left behind. I think Palo Alto is already left behind, and although Zscaler and Crowdstrike are hot now, they need to keep improving to keep up with Cloudflare. Cloudstrike stock has been acting ill, but Zscaler’s been strong. NET was added to the Growth Portfolio last qtr, and this qtr I will add it to the Aggressive Growth Portfolio. I think Cloudflare, Fastly and NVIDIA are the leaders in this new era of computing.

One Year Chart

But the stock broke out from $32 to $35 on June 17th (not earnings related) and the stock hasn’t looked back since. I think we’re lucky to be able to buy while the stock is still in range. Many software stocks have made parabolic moves and are now too-high-to-buy. NET looks good here around $40.

There are no profits to show, and that means there’s no P/E ratio. There isn’t an Est. LTG either.

Earnings Table

Annual Profit Estimates increased slightly this qtr, but losses are still expected.

Qtrly profit Estimates are for losses in each of the next 4 qtrs.

Fair Value

The company is expected to do $400 million in sales this year, and the market cap is $12 billion. It sells for 30x expected sales, which is high.

Bottom Line

Cloudfare (NET) has a perfect combo of 

I think Cloudflare, Fastly and NVIDIA are the top three stocks to own in this revolutionary computing era.

NET moves up from 35th to 14th in the Growth Portfolio Power Rankings. Today I will add the stock to the Aggressive Growth Portfolio, where it will rank 14th of 22 stocks.

Power Rankings

14 of 47

Aggressive Growth Portfolio

14 of 22

Conservative Stock Portfolio

N/A