For anyone who skimmed through my long end of the month, there were three companies who seemed to me to be standouts. If you didn’t get to read it closely, here’s what I wrote about Cloudflare.
Saul
Cloudflare
Cloudflare announced December quarter results on Nov 9th. The numbers have been discussed extensively on the board so I won’t repeat them, but I will give you my impressions and thoughts. Here they are:
My quick summary: This company had been delivering revenue growth in the high 40% to mid 50% range for many quarters sequentially. In addition they innovate and come out with new products and improvements at a pace that neither I, nor anyone else, has ever seen before. Quarterly revenue growth this quarter slipped to 42%, but they finally showed that they can make a profit and collect FCF, and management was incredibly positive in their presentation. For example (all quotes may be paraphrased):
“We expect to be free cash flow positive in 2023, and in the years after that.”
“We still see a clear path to NRR over 130% … and we won’t be satisfied until we get there.”
“In 2022, we had over 400,000 people apply for about 1,300 positions. That has allowed us to continue to hire incredible talent while remaining disciplined in overall compensation”.
“As our products become more complicated and we are selling to larger and larger customers, it’s increasingly clear that we need to step up our game in S&M…”
“Marc Boroditsky joined us last quarter to lead our sales organization. Last week, he briefed us on his first 100 days. My initial reaction, if I’m honest, was embarrassment over some of the basic things we should have been doing better. But my second reaction was excitement, as there are so many opportunities for us to improve.”
“I’m aware that these efforts can take time. That’s why we’re not relying on any improvement in S&M efficiency, or any rebound in the economy, as we formulate our guidance.”
I should point out that they had record operating income, operating cash flow, and free cash flow.
Market Response – Cloudflare initially rose about 10% after announcing results, but have settled back with the market and are now up only 2% since announcing results, BUT they are up 31% ytd (in just two months), the most of any of my companies…
My Reaction – Management came to the realization that they have over-focussed on R&D without enough focus on actually marketing and selling all those wonderful new products, and they have started to correct that oversight. That sounds extremely positive to me. They haven’t included any improvement from the new S&M, or from macro improvement, to their guidance, so I would guess they will beat their annual guidance considerably. I added to my position, and Cloudflare is back up to 16% and in 3rd place in my portfolio.
Perspective – Cloudflare’s November 2021 high share price was around $221, about 3.7 times the current price of $59.20, while current trailing revenue is about 1.49 times trailing revenue back then, so you are getting about 5.5 times as much revenue per dollar of stock price now as you were getting then, and the company now is profitable and cash flow positive, as well.
I hope that this was helpful as well!
Saul
