Some thoughts about Cloudflare (Understanding Cloudflare)

I get the feeling many find Cloudflare difficult to grasp, and decided to try and contribute a bit by replying to a post in this thread:

It became quite long-winded, however, so thought it’d be better to put it in a separate thread. (@HannesRS I’m quoting you simply because this began as a reply.)

In my case, Cloudflare is the easiest company to grasp and see a clear path many years into the future. It’s my largest holding and I never lose any sleep about it. So perhaps I’m an outlier.

Cloudflare is a disruptor. It’s a unique company in an enviable position. Whereas many other companies need to work hard to try to expand from their niche into new areas and products, Cloudflare is in a position to pick and choose. Their platform/product is “internet”. Contrast this with observability, endpoint security, Zero Trust, collaboration, identity management and so on.

Having so many offerings, and things in their pipeline - underpinned by their own infrastructure, they’re able to quickly change priorities. And perhaps this strength is a source of confusion in trying to understand where they’re going.

A couple of years ago, Cloudflare registered the trademark “The Network is the Computer”, a phrase that’s very familiar to me from my time at Sun Microsystems - the origin of the trademark. By now, it’s clearly a good phrase for describing where we are and where we’re heading, and also helpful in trying to make sense of Cloudflare.

Mathew Prince - Q3 earnings call (emphasis mine)
And what I mean by that is, fundamentally, what Cloudflare is, is a network. And we want to be the best network to connect anything online, to connect cloud-to-cloud, cloud to home office, cloud to remote office, cloud to branch office. Anything that is having to be connected by a network, we want to be that network.

They’re not CDN, they’re not R2, they’re not Zero Trust. All of these things are parts of a greater whole.

The lack of progress to be meaningfully profitable is a feature and a strategy. The more they grow the platform and the user base the better. It’s a game of becoming a dominant force.

In my view the narrative as a driver wasn’t Cloudflare’s making, but rather writings, analysts, articles, speculation about “the fourth cloud” etc. R2 was a step forward, and is now generally available. It’s there, anyone can use it.

The thing is, R2 is a comparatively simple component to use with a usage based pricing model. Zero Trust, on the other hand, is a more complicated solution and a place where you want to put effort to land larger deals.

I believe Palo Alto and Zscaler will have their place. But Cloudflare is already in a position to be able to offer Zero Trust to just about any company, start-up or organization. Anyone using Cloudflare for anything is just a few clicks away to start their journey, right from the dashboard:

In fact, they even have a free tier:

So me, my laptop and I now have Zero Trust:

Not that I need it, but how’s that for awareness?

Mathew Prince
And so our job is now just to increase our awareness and go from the company that people might have known us for doing one thing is today a much more sophisticated, much more broad portfolio. And I’m excited as that grows. And I think that Zero Trust is very much going to be the story of the next few years to come.

So, I wanted to give an visual illustration, because it gives an understanding of Cloudflare and just how integrated and competitive their broad portfolio of services are. They’ve turned Zero Trust into a feature and are pursuing that market from several angles at once. One could even stretch it to say they’re disrupting the Zero Trust market:

Yes, the main players are still Palo Alto and Zscaler. (I have a tiny position in ZS too for some reason.) And Cloudflare is still waiting for FedRAMP. FedRAMP is a tree in my opinion.

My take on Cloudflare’s Q3 earnings:

It was a decent quarter. Mathew has been very transparent and clear, and pretty much telegraphed a slowdown in the Q2 call (emphasis mine):

Today, we find ourselves in what my grandmother used to call it tule fog. The road ahead is less certain, so it makes sense to keep our hands on the wheel, our eyes on the road and let up a bit on the accelerator.

The growth was not what I had wished for, but pretty much in line with my expectations. They also reiterated that they expect to be FCF positive for H2 2022. Fine by me.

Edit: Disclosure - I have an outsized position in NET, but I also add to positions with new money on a regular basis. I.e. I’m quite indifferent to regarding the company stock price, but naturally not unbiased in my perception of the company itself.