Fast-moving software company Cloudflare (NET -1.30%) has been growing its revenue at a steady 50%-plus rate recently. That has not saved the stock from a vicious tumble from all-time highs this year (shares are down nearly 60% in 2022 as we head into the fourth quarter). However, the company is committed to investing in new product development and marketing to maximize its expansion.
Recently, Cloudflare unveiled a number of new services that should help as it tries to edge its way into the large and fast-growing cybersecurity market. Here's what you need to know.
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The next contender for the cybersecurity crown?
Cloudflare has carved out its niche in the tech world with its content delivery network (CDN) located at the network edge. These localized data centers close to the internet end user have helped many developers increase their web apps' performance. Security has always been part of what a CDN business does, since requested data arriving at the right place is a given for internet users. But Cloudflare has steadily increased its capabilities in cybersecurity, creating a classic "land-and-expand" business model.
Enter what Cloudflare is calling the "Zero Trust SIM." A SIM (subscriber identity module) card is a small removable chip that stores information about a mobile network subscriber -- most commonly in a smartphone but also in other devices like tablets and anything else a wireless carrier might allow to connect to its network. A SIM card enables operation of the device on the mobile network, which is how a mobile carrier identifies the user for billing purposes.
Cloudflare's Zero Trust SIM will be an electronic SIM, not a physical chip. This would make it easy for a company to deploy it via a software update. The Zero Trust SIM would connect a device to Cloudflare's edge network, extending its Zero Trust security services to mobile devices.
This will make the Zero Trust SIM a bit different from endpoint security services like those offered by CrowdStrike. Cloudflare says these software security agents for endpoints (smartphones, tablets, etc.) are an important part of a company's security system but still leave vulnerabilities since not all data and applications leaving a device are encrypted. The Zero Trust SIM is intended to fill that gap. Cloudflare also said it will be launching the Zero Trust for Mobile Operators program, which will work with mobile network carriers to offer the Zero Trust SIM to subscribers.
How big a deal is this?
Cloudflare is quickly homing in on $1 billion in annual revenue, but mobile security could help it keep expanding well beyond that goal. Spending on Internet of Things (IoT) devices and services ballooned during the pandemic, and the mobile world isn't going away anytime soon.
But device-level security is still behind the curve in many respects. User error and lax behavior are among the leading causes of successful cyberattacks. Automating security at the device level (so the employee doesn't have to think about security measures) could go a long way toward keeping large enterprises' IoT fleets safe. Some estimates point toward mobile and IoT security growing at a double-digit-percentage pace throughout the next decade and encompassing tens of billions of dollars in annual spending.
Cloudflare could be onto something really big here. The company is ambitious and isn't shying away from taking on the cloud titans like Amazon's AWS and the cybersecurity market. But how long can the torrid pace of expansion last? Co-founder and CEO Matthew Prince has said the company will continue spending profits, down to zero, until it starts running out of opportunities.
The market certainly thinks the company's exploits will keep paying off for a long time. Even during this bear market, the stock trades for 23 times enterprise value to trailing-12-month revenue -- a premium price for a company that isn't turning a profit yet.
If you're looking for a small and disruptive company with lots of potential, Cloudflare's recent cybersecurity product announcements are more proof this is a top stock to consider. If you do buy some shares, buy only if you can stomach the volatility and have at least a few years to let the company execute on its vision.
