Can Cloudflare Continue to Disrupt Big Tech?

Can Cloudflare (NET 0.70%) continue to innovate in order to cut through the competition? In this clip from "3 Minute Stocks Updates" on Motley Fool Live, recorded on Feb. 16, Motley Fool contributors Brian Withers and Toby Bordelon discuss how the cloud company has been able to disrupt the industry and successfully differentiate itself among the competition.

Brian Withers: Moving on to Cloudflare, ticker symbol NET. Like Twilio (TWLO 1.84%), Cloudflare has an incredible land-and-expand motion and I have some slides. Here we go. First, strong dollar-based net retention and you know what I love, it's just inching up every quarter. Really awesome. They talk about on the right-hand side here, large customers are a tailwind to DNR. What's DNR? Dollar-based net retention. Let's look at large customers. Here on the left, here's the number of $100,000 annualized revenue customers. They take the current quarter for these 1,416 customers and and annualize it. They are on a $100,000 annualized run rate and that's gone up 69% compound annual growth rate over the last four years. These customers, on the right-hand side, are becoming a much bigger portion of the company's overall revenue. In 2018, those large customers were 32% of revenue and now they're 54% of revenue. Now this isn't concentrated customers, this is 1,400 customers so this is a tremendously spread out deal where larger customers are becoming a bigger portion of the overall pie. I love this. This is even more exciting. The last slide showed you the $100,000 customers on the left but look at the $500,000 dollar customers up at a 65% CAGR. There's about 121 of those today and, the $1 million customers, there aren't too many SaaS companies that can claim that they have $1 million annualized revenue customers. Even though the number is really small, to me, that shows me that the Cloudflare platform has a ton of optionality and it's going to pull these $100,000 customers. It's going to continue to add those and it's going to pull them into the middle bucket and the right bucket. So I'm super excited about what the company is doing with their large customers.

Toby Bordelon: Brian, based on those slides I just saw and what you're talking about, things are looking really good. But, there are always risks with an investment. What should I be concerned about here?

Withers: Yeah. Cloudflare is disrupting the industry a bit. I got a couple of slides again to show you where they fit in. You can see Cloudflare here is the network which, in the past, used to be really hardware and some software. You can see FireEye (MNDT) is a cybersecurity company, Palo Alto (PANW 1.43%), Cisco (CSCO -0.37%) and Juniper (JNPR 0.14%) and then Fiverr (FVRR -1.17%) are hardware companies. And really, you're replacing that with an all-software platform. As these old-school companies wake up and move to more software-based platforms, that's a potential. The middle section application that's really not something that Cloudflare is getting into and those will continue to be on its own. But the store compute business, look at those ones on the bottom, Google (GOOG 1.43%) Cloud, Microsoft (MSFT 0.46%), AWS [Amazon (AMZN 1.49%)]. Those guys could say, hey, we're going to get into this network software business that Cloudflare is in, and so that's a potential for them. They are facing competition on all sides. Innovation has been a critical enabler for them to grow. You can see in 2018 on the bottom left, they had about a $32 billion addressable market. They talk about CDN services and a little bit of firewall security things. This Cloudflare One box and the orange boxes, that's the Cloudflare network services. And, Zero Trust is becoming a much bigger opportunity in these areas for potential incremental growth over here. They're going to execute these really well to keep customers on their platform and continue to grow. So, watch the innovation pipeline and watch the competition.