Cloudflare, here's what we were missing!

Hi all. I feel intjudo’s take (#10) sums it up in a sentence or two, but permit me a few more.…

Here’s my take on why the stock’s valuation is so astronomical, as a response to Saul’s original question.


Regarding NET’s valuation, you are certainly right to dwell on this question – the stock is shooting through the roof even as the actuals of execution remains muted.

I do see a couple of good signs in the financials, and if I didn’t see these I would be questioning the company’s ability to execute.

  • ?Signs of architecture leverage: Yes they aren’t profitable but the trends are in the right direction and gross margins rise even as they add to their stack’s product lines and spread their networking interconnectedness.
    ?* Signs of GTM pivot to enterprise: accelerating RPO and enterprise cust growth, plus how US segment went from +50% to +60% (the main market they are selling Zero Trust and SASE into) shows it is working
    ?But those alone aren’t adding up to the irrational exuberance, as you so eloquently described it.
    I think it’s the signs of PLATFORM leverage that has everyone so in love with them. Which is where you started to go around tech oriented investors starting to buy into the vision. Quite simply, their architecture has a LOT of optionality. The CEO recently drew a line in the sand on how they think of their goals – that they can be the 4th cloud to emerge. (Right now, you are talking about a #3 Cloud with $20B run rate, and #1 with $64B.) ?Very lofty goal… but one that is visibly achievable with their stance, architecture, and, most importantly, their pace of innovation and software release.

But going beyond that – their platform can move in ways that disrupt a lot of different directions from here, so I expect their hypergrowth to accelerate and continue, as more and more adjacent markets get entered. Remember how they bolted on Zscaler’s capabilities early last year? That is just the start. Next up is going up directly against AWS, as a developer focused cloud w/ Workers and other primitives. In Birthday Week this year, they showed their plans against AWS in more clarity, with distributed object storage (and hints of more to come), and against Agora & Twilio in real-time video streaming. These are just the “edge primitives” for now, to allow them, as well as other developers, to take better advantage of the platform going forward – but like how SaaS was built over cloud, new products and technologies will get built on top of their edge network, aka a “global cloud over a programmable network”.
??The forward-thinking big institutional buyers are paying attention to NET now, and are amassing it, as seen in the ever rising price. They are buying into the vision laid out by the CEO and company, and are going to watch it play out over the next few years, to both watch that the company can cross the line laid in the sand as an “edge cloud”, plus then see what else can show up as added TAM from adjacencies.

Not surprised, however, if it drops out of your top 8-10 based on the current financials. It’s a longer term play and vision. So this might be a company that drifts in and out of your/others ports with the rules of your/their style – but I expect this will be a company to watch over the years, and should it exit your top 10, may reenter later when the revenue likely accelerates.

You and I held Okta a long while, Saul, even as top line growth dropped, given how good their position was in the enterprise SaaS ecosystem and Zero Trust. For a few quarters, I couldn’t find flaws in execution, so kept holding on as it scaled up profitability. However, in that particular case, they didn’t find the replacement to have hypergrowth continue onward in a sustainable way, and ultimately I found a flaw in execution (product cadence) to blame. Absent visible execution issues, it might be worth holding onto Cloudflare to see if they find the next hypergrowth lever over the coming quarters. And if they find that, I bet they find another, and another, and another.
?Hope that helps.

  • muji