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1 High Growth Stock I'd Buy Right Now

By Brian Withers - Mar 5, 2021 at 6:49AM

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This cloud play has a long runway of growth ahead.

Growth investors love companies that show stronger-than-average top-line growth and operate in large and growing markets. The infrastructure-as-a-service company, Cloudflare (NET 2.23%) fits those criteria to a "T." On a Fool Live episode recorded on Feb. 18, Fool contributor Brian Withers provides a detailed overview of the company, its growth strategy, and why he loves the long-term prospects for this cloud specialist. 

Brian Withers: Similar to Danny's, this one's taken a run-up, but I don't think the run is over at all. Cloudflare has this incredibly simple but powerful mission "to help build a better internet".

This is their integrated cloud platform. We can see all the services that customers can sign up for, whether it's security services, whether it's zero trust services, network services, firewall, content distribution network, developer edge platforms to allow their websites to be controlled at the edge and make a much faster connection for their customers. Then certainly their global network here that helps with compliance and just global reach.

They can reach globally because they have 200 cities where they have their networks set up. They got paying customers in 175 countries and can reach 99 percent of the world's internet-connected population within 100 milliseconds and that's going to get better with scale too.

As they bring on more customers, they can test more products and they are testing products at scale. They'll bring forward a new product to their 3.5 million free users and say, "Hey, who wants to participate and provide feedback to this new platform?" They'll robustly test that at scale all around the world before they release it to the customers. That's super cool.

This is a really busy slide. But at the end of the day, the total addressable market (TAM) is just getting bigger and bigger. This orange box is that Cloudflare One that you saw in the earlier slide and that's a combination of product for enterprise customers to get both the Cloudflare network services and their zero trust all in one package. This once was 32 billion going up to 100 billion and that doesn't even include these other potential growth paths over here with the Internet of things, 5G, cellular, etc.

Strategy for growth, similar to other SaaS companies, acquire new customers, expand the relationships, develop new products, and extend their platform. This has resulted in a tremendous growth model for these guys, a 50 percent compound annual growth rate year-over-year. They just finished their 2020 year with $431 million in revenue.

But this is the part that I'm excited about. Their large customers, more than $100,000 revenue or growing even faster at 73 compound annual growth rate, and their revenue contribution is growing at a 90 percent compound annual growth rate from 20 percent of revenue in 2017 to actually it was 49 percent in Q4. So almost half of all their customers are large customers paying more than $100,000 a year.

This is the money slide I tweeted out last night, 100k customers, 73 percent, 500k, 86 percent. One million-plus customers, that's the annual spend, doubles every year to 32 one million [annual dollar spend] customers now and they're not stopping.

Net dollar retention means customers are paying more every year and that's improved for the last three quarters. Gross margins are stable and high, which helps the platform leverage. As revenue goes up, gross profit stay stable. You're getting an operating leverage, which is helping their bottom line and helping them invest more in R&D.

My favorite land-and-expand slide. This is where, as you add customers and as those customers grow, your revenue growth just accelerates. Look at this, 88 percent of all contract customers are using four or more products. That's the power of the ecosystem. Strong cash balance. A billion dollars in cash, a little bit negative on the operating cash flow, but they got years worth of cash that they can continue to invest in for growth.

So disrupting a large market, growing addressable market, they have a highly efficient business model and it's a subscription revenue model. So they're not charging customers if they have a cyberattack or whatever. It's a consistent, stable subscription price that customers love, that they can count on and plan for.

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Cloudflare, Inc. Stock Quote
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