An interesting facet of the heated Cloudflare debate that sticks out to me is that a lot of each person’s reaction depends on how they felt prior to this quarter and conference call.
If you thought that the company is doing something revolutionary and has a great plan and a great product that almost sells itself, your response to the quarter was probably to be sympathetic to Prince and glad he’s weeding out folks who can’t sell it.
If you were less in love with the company (but wanted to hold as long as they kept the streak of good results and earned their premium), and you thought Prince was fine, but no magician…just a good leader with a good company, your response to the quarter was probably that the guidance reduction showed that Prince is mortal and you probably weren’t surprised by that, but the reduction probably didn’t make you happy.
If you were less in love with the company (but wanted to hold as long as they kept the streak of good results and earned their premium), but you really respected Prince and trusted him to steer the ship masterfully, your response to the quarter was probably to feel let down by Prince and that the stock is an obvious sell.
I put myself in the second group. I trust Muji and Peter Offringa and others who believe NET could be building something great, but I note that their tense is generally future with this company. I decidedly didn’t trust Prince to pull a rabbit out of his hat no matter what the environment, etc. Therefore, I held a small position in this very expensive stock. Back in January, I held a slightly larger position, and I was trimming it as it went up. I said this at the end of January in my portfolio review:
I don’t feel as good about Cloudflare long term as any of the top 3, and one reason is simple: I’m not sure how profitable they will become [note: I still question if they can get past 20% net margin] … Another reason is that I simply haven’t ever been able to get comfortable with their growth drivers. I know they are a leader in CDN/DDoS (whatever those are), but Cloudflare One and R2 are much much smaller parts of their total revenue. Therefore, I really feel like this is our most speculative company. Sure, I believe they will continue to do well in all their segments, but I don’t know how to begin to quantify that. And they don’t even give us any visibility into growth rates by segment. I’d just be uncomfortable if this one got too big…
If you, like me, saw this as our most speculative company, you’re probably selling on a bad quarter. If you think they’re revolutionary, you might be adding.
If you don’t see this company as speculative, I’d like to hear your reasons.