The recent bout of market volatility has many investors feeling anxious. High inflation, the omicron variant, and potential interest rate hikes in 2022 have conspired to spark a significant sell-off in growth stocks, and none of those variables are likely to disappear in the near term.
What should investors do? First and foremost, keep a level head. Remember that no one knows the future, so it doesn't make sense to sell your portfolio in anticipation of a downturn. And, while market crashes are never pleasant, they can present great buying opportunities. In fact, Warren Buffett once advised investors to "be greedy when others are fearful."
As you prepare for the next market crash -- and no one knows when it will happen -- it makes sense to keep a watch list of stocks and a cash position in your portfolio that you can use to buy those stocks when they go on sale. Cloudflare (NET 1.40%) is at the top of my watch list.
Image source: Getty Images.
Competitive strength
Cloudflare provides a range of cloud services that accelerate the performance, reliability, and security of the internet. That includes external technologies like customer-facing websites and applications, and internal infrastructure like corporate networks and devices. Behind the scenes, Cloudflare says its global network sits within 50 milliseconds of 95% of internet users worldwide, and it offers over 100 terabits per second of capacity. In other words, it can move a lot of data very quickly.
Cloudflare's product portfolio builds on that foundation. For instance, Cloudflare Workers allows clients to write code and build applications directly on the network. And Cloudflare Pages provides a similar solution, except it's used to build websites. In both cases, the applications and websites are fast, secure, and scalable, and clients receive those benefits without the cost and complexity of managing the underlying infrastructure.
Forrester Research recently recognized Cloudflare as the leader in "edge development," as its Workers platform outranked competing products from cloud titans like Amazon and Microsoft. Perhaps more impressive, as of December 2021, over 19% of websites rely on Cloudflare to accelerate and secure content. For perspective, Fastly is the next closest competitor, and its content delivery network powers just 1.5% of websites.
Impressive financials
Cloudflare has established itself as a key enabler of digital transformation and seen strong demand.
During the third quarter, Cloudflare's customer base grew 31% to 132,390, and the average customer spent 24% more than the year before. More impressively, the company now has 1,260 customers that pay over $100,000 per year, up 71% from a year ago. Revenue skyrocketed 51% to $588.8 million over the past year, and on the bottom line, Cloudflare generated $15.2 million in cash from operations, up from a loss of $16.9 million in the previous 12-month period.
Prospects for future growth
The future looks bright for Cloudflare. The founder-led management team has demonstrated its capacity for innovation on countless occasions, most recently with the launch of R2 Storage. The company already offers a variety of cloud services, so storage is a natural extension. More importantly, R2 Storage will supercharge its developer platform, allowing clients to build more demanding applications. It will also undercut competitor pricing by at least 10%, according to the company.
Looking ahead, management puts it addressable market at $86 billion in 2022, but that figure should reach $100 billion by 2024. For that reason, given its strong competitive position and impressive financial performance, Cloudflare looks like a smart long-term investment. And that would only be more true if a market crash cut the share price down.
Of course, you don't have to wait for a market crash to buy this stock. Cloudflare currently trades at a very pricey 72 times sales -- and that's after the share price plummeted 35% in the last month -- but I think it's OK to build a small position through dollar-cost averaging. That being said, if the market crashes and Cloudflare drops, I plan to buy this stock hand over fist.
