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This Could Be a Monster Stock in the Making

By Trevor Jennewine and Olivia Zitkus – Oct 29, 2021 at 12:15PM

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Cloudflare has a differentiated business model and a big market opportunity.

Cloudflare (NET 7.25%) is a cloud services company. Broadly speaking, its platform accelerates the performance, reliability, and security of corporate resources, including applications, networks, and devices. And as trends like digital transformation and remote work have gained traction, Cloudflare has benefited from strong demand. But can the growth continue?

In this Backstage Pass video, which was recorded on Oct. 15, 2021, Motley Fool contributor Trevor Jennewine discusses with Motley Fool analyst Olivia Zitkus Cloudflare's competitive advantage and its growing addressable market.

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Trevor Jennewine: The next few slides are going to go into the company's competitive position. This shows an overview of where they think their strengths are. Then this breaks down, there are a lot of different competitors in this field that offer a variety of different solutions.

There are on-premise solutions -- and we touched on that earlier -- where you buy network hardware, and these are physical devices like internet gateways, VPN hardware (virtual private network hardware), load balancers. There's all these different appliances that need to have on-site to enable a secure internet connection, and to allow employees that weren't on-site to actually portal in and connect your corporate network.

Those things are not expensive, I mean they're not inexpensive. You have a significant upfront expense; but they also require maintenance and that means you need IT staff to maintain them over time. And that's complicated and may cost a lot of money. Cloudflare has an edge by delivering its services through the cloud -- it eliminates all that. You don't need the on-site hardware, you don't need a huge robust IT team that's going to be maintaining the solutions over time. You get everything you need from the cloud, and you don't have to pay enormous sums of money upfront. You pay as you go, rather than investing all that money upfront.

There are also point solution providers in this industry. For example, Akamai is a company that has a massive content delivery network. But its security offering is not as robust as, and it's network services are not as robust as Cloudflare. And there's also Zscaler, which focuses on the networking and security side, but not so much on the content delivery side. And that's not to say that these aren't good companies. Zscaler is a fantastic company. But Cloudflare has, the breadth the Cloudflare offers sets it apart from those companies. So, f you're looking for a one stop shop, that can help you accelerate content, protect your content, and provide a reliable experience for end users. Cloudflare has an edge there. Go ahead Olivia.

Olivia Zitkus: Sorry, I was just going to say I did look up on my question about that Fortune 1,000 and on Cloudflare's S-1, I think it was August 2019, I think there were serving about 10% of the Fortune 1,000. That's all I wanted to deposit.

Trevor Jennewine: Yeah, that's strong growth in a few years.

Olivia Zitkus: Yeah it is.

Trevor Jennewine: Your public cloud companies are going to be Amazon, [Alphabet's] Google, Microsoft, and all of those companies have massive cloud computing businesses that offer far more services than Cloudflare. But Cloudflare's benefit here is that it works with all of them.

So, Cloudflare is cloud agnostic, and that means it's not biased toward Microsoft or it's not biased toward Amazon Web Services (AWS). It sits on top of all of these different infrastructures and it gives you a unified control plane that allows you to basically manage your resources across different public clouds, hybrid cloud environments, multi-cloud environments. And in doing so, Cloudflare gives it's clients the freedom to choose whichever public cloud vendor they want to work with. AWS might have better prices for certain services and maybe Microsoft Azure has better prices for other services. You don't have to decide; you can work with whichever cloud vendor you want. And Cloudflare will sit on top of that infrastructure and help you accelerate performance, security, and reliability across all of those different networks.

Those are the three things that differentiate Cloudflare from everybody else that's out there. I think the company has a strong competitive position, and that takes us into what's its market opportunity. Back in 2018, the company was primarily focused on application services. This is the content delivery I have been talking about. Then they release their zero trust solution, Cloudflare for Teams. And Cloudflare One, which is their network services. So, you can see that's shown over on the right-hand side here, and you can see that that has really boosted their market opportunity, so from $32 billion in 2018, the company expects that to reach $100 billion in 2024.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Trevor Jennewine owns shares of Amazon and Zscaler. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Cloudflare, Inc., Microsoft, and Zscaler. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool has a disclosure policy.

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