Cloud computing and network services company Cloudflare (NET -3.98%) has seen its shares soar nearly 400% over the past 12 months. Investors have clearly grown to love this company. But why?
Here's a closer look at the growth stock -- and why Cloudflare's business achievements have made the young company a Wall Street favorite.
1. Torrid growth
Cloudflare's revenue has consistently grown at rates of around 50% year over year. Indeed, for both the company's full year and fourth quarter of 2020, revenue was up 50% year over year.
Increased spending from existing customers and a surge in Cloudflare's total customers have fueled this growth. Importantly, customer growth remains strong. After crossing 100,000 paying customers in the third quarter of 2020, the company ended the year with 111,000 customers.
Though Cloudflare isn't profitable yet, its business is clearly scalable. The company's non-GAAP (adjusted) operating margin has been consistently improving. For the full year of 2020, Cloudflare's adjusted operating margin improved by 1,690 basis points to -7.9%, bringing the company closer to profitability.
3. Rapid product releases
Business execution doesn't get much better than what Cloudflare demonstrated in 2020. The company delivered over 550 products and capabilities during the year.
"Innovation is the energy that fuels Cloudflare, differentiates us in the market, and enables us to help build a better internet," said Cloudflare co-founder and CEO Matthew Prince in the company's fourth-quarter earnings release.
4. Big guidance
Of course, investors in growth stocks want more than strong top-line momentum today. They want expectations for more strong growth in the future, too. Fortunately, Cloudflare management believes these are still early days for the company. Backing up its optimistic view, the company said it expects full-year 2021 revenue to be between $589 million and $593 million. The midpoint of this guidance range translates to 37% growth in 2021 over 2020.
Cloudflare is known for providing conservative guidance, so it's likely that the company is set to grow even faster than its estimate implies.
Is Cloudflare stock a buy today?
Though Cloudflare shareholders have enjoyed a great run, investors new to the stock may want to think carefully about buying the stock at its current valuation. Sure, a company executing this well deserves a premium valuation -- but the stock's price-to-sales ratio of 61 leaves little room for error.
While Cloudflare is certainly worth a place on investors' watchlists, it may be wise to see if the stock price takes a meaningful dip before picking up shares of this growth stock.