Cloudflare (NET) is currently a HedgeyeTech Bench Long.
CALL DETAILS:
- Date & Time: Thursday February 2 @10AM
- Links to follow closer to the call
Today we see Cloudflare as a company with long term opportunity, short term growth deceleration, and a stock that has likely over-baked both possibilities at various times in the L12M which cautions investors to take extra care in evaluating the medium term opportunity. Our call aims to flesh out the strongest positives and negatives, and evaluate whether Cloudflare is a Long or Short.
What our call is about:
- New data including:
- site detection
- traffic
- RP market share
- SEO
- code download pace
- P+L analysis
- revenue and use case analysis
- & more
- New Bull/ Bear. The outline is below but we will share the analysis behind each point.
- New L-T and S-T growth targets
…goal for this work is to get us to a new conclusion L or S
Bear case:
- Penetrated. Cloudflare doubled their customer presence in the Fortune 500 across 2022, a feat that will not repeat, and the company now serves 18 of top 20 largest companies in the world and ~20-25% of total internet traffic. The growth exhibited in recently achieving the latter two pinnacles is unlikely to be matched in the coming years.
- Evidence of Saturation. Cloudflare adoption has slowed, while monetization has been excellent, implying the company has eaten into the SAM, and unless the SAM reaccelerates, implies slower growth ahead for the critical $100K+ revenue and RPO category.
- Cloudflare’s Business Model (or ethos) does not support getting long big ARPU increases. Notwithstanding the first in five years price increase on the (minority of revenue) self-service segment, Cloudflare prides itself on not jamming customers with unwanted software packages, complex ELA’s, or over-pricing needed features. We will exhibit that other than some narrow upsell moments in time (such as a narrow subset of customers in FY21), it is difficult to buy Cloudflare for an upsell motion. Thus, if adoption has slowed, the whole bookings motion will slow considerably.
- Innovation cemetery. Cloudflare exhibits a similar optimism for innovation that was characteristic of Google ~10 years ago. And, like Google, NET also has the beginnings of an innovation cemetery problem where groundbreaking products are launched to great fanfare, are (mostly) intentionally left without P+L, and consequently are maintained with skeletal staff unable to make do on biggest promises as the buzz and crowd shift elsewhere. For example, only 56 people committed code to Workers, a flagship product, and some of the major past product launches have to get by today with only a handful of engineers.
- Stickiness in Capex native to the model.
- Employee tone has changed a bit recently, such as some pointing out that the CTO is “checked out”, as well as recent comments about problems in the sales culture.
Bull case:
- Deceleration in 2023 may be better than feared. Despite weaker data, we see a chance that guidance for Cloudflare outpaces the deceleration already evident in Street estimates, and when coupled with delivering incremental OCF, it creates the combination that has been a recent formula for SaaS outperformance when reporting results
- Recession playbook. Going to Cloudflare is a chance for customers to consolidate vendors, spend less in aggregate, and push Capex usage burden onto someone else. Why wouldn’t that playbook continue now, especially as companies try to streamline costs?
- Penetration is high with 18 of the top 20 companies in the world on Cloudflare. But looking at the larger companies in the sector, NET’s adoption curve can survive much longer.
- Shift to profits. We will articulate what we see ahead in this model and how expensive can become cheap.
- Workers has competition like every mega trend but has a chance to be a next major wave of computing, somewhat like AWS Lambda in opportunity size.
- The original vision of the founders of shifting networking to the cloud remains a viable, large opportunity today.
END
