February 14, 2021

Thesis - Cloudflare offers a suite of services that improve the speed, security and performance of business websites and applications. They have built a network across 200 cities and 100 countries. This means 200 physical data centres, with computer servers, that deliver data to websites. This is known as an “edge” network - by being closer to their end users, they can deliver the data faster. The range of services Cloudflare offers has grown impressively since its launch in 2010. In addition to their content delivery network (CDN), described above, they offer security services, Firewalls, VPNs, load balancing, rate limiting and video delivery. Clearly, this is a technical company and it’s hard to avoid the above technical jargon. It’s easier to understand their go-to-market. Cloudflare’s approach is to offer a large portion of their services for free. They then convert free users to paid customers through enhanced features and support on a subscription basis. This strategy has been working well, as they have successfully grown both the total customer pool and large customers significantly, whilst allowing them to re-invest in product research and development. In the last two weeks, the core Cloud companies (Microsoft, Amazon and Google) all announced fantastic numbers across their cloud divisions. They continue to highlight the healthy mega trend that is cloud computing. Cloudflare operate in the next tier of companies, which offer additional services and security on top of the core cloud. Of those, Cloudflare is showing signs of consistent execution and broad optionality, which should hold this company in good stead moving forward.

Financials & Performance - Cloudflare went public in 2020 and delivered $431m in annual revenue. Over their first 6 quarterly reports, they reported revenue growth between 47-54%. The consistency with which it can achieve such aggressive revenue growth shows both its large market opportunity and attractive go-to-market strategy. They have over 3.5m total customers and are growing their large customers impressively. Between 2017 to 2020, >$100k customers grew from 160 to 828, >$500k customers grew from 11 to 71 and >$1m customers grew from 4 to 32. They reported a dollar-based net retention of 119%, which increased slightly and have gross margins of around 77%. They’ve also shown that customers typically use more of their products. In 2020, 70% of customers used 4 or more products. Now 79% of customers use 5 or more products. This is both a function of time, but also Cloudflare’s impressive product velocity. This is perhaps one of Cloudflare’s most impressive attributes, but also difficult to show in any specific number or metric. Cloudflare has been delivering new features, products and launches at an impressive rate. They expand their product suite in both depth and breadth, enabling new use-cases and attracting different customers. Their broad mission “to create a better internet” supports a diver range of product initiatives.

Leadership - The company was founded by Matthew Prince, Lee Holloway, and Michelle Zatlyn. Matthew and Michelle lead the company today, with Matthew as CEO and Michelle as COO, having developed Cloudflare after their time together on Harvard MBA. Both have high ownership in the company, at around 12% and 5% respectively. On, 88% of people approve of Matthew as CEO.

Risks - Cloudflare is currently valued at $26.41b. Investors are projecting strong continued growth, so if we were to see that fall you would expect some volatility. Last Thursday, Cloudflare actually dropped 6% after its earnings call, with some investors citing conservative future guidance. However, in its short time as a public company, Cloudflare has been known to under promise and over deliver. Whilst the company might be overvalued in the short run, its ability to launch new products should grow its total addressable market in the long run.

chart showing Cloudflare key metrics

Written by Stevan Popovic, growth investor, web developer and founder of this site.