The past three years have been a wild ride for Cloudflare (NET 1.44%). Despite remarkably consistent business results, the stock was caught up in a bull run and a bear market. Shares jumped from around $16 in early 2020 to as high as $217 in late 2021, before falling back down to $37 late in 2022.
With stock price movement this drastic over a relatively short time, it's easy to forget how wonderful a business it is. Let's look at three things about Cloudflare that smart investors know.
1. Cloudflare is making the internet better
Granted, that is Cloudflare's mission statement, but it actually does do a nice job of summarizing what Cloudflare does, which is important to know as an investor. In short, the internet was not built for what it has become today. As a result, businesses everywhere are transitioning from legacy infrastructure and security systems to cloud-based solutions.
One way Cloudflare accomplishes this is with its edge computing networks. By bringing the physical computing locations closer to the end user, the internet experience is faster because the data doesn't have to travel as far.
Cloudflare has built out at a massive scale in a short time. Currently, 95% of the world's population is within about 50 miles of one of its data centers.
2. Cloudflare has a rapidly growing customer base
In addition to the growth of its physical infrastructure, Cloudflare has also increased its customer base in an impressive fashion. It ended 2022 with over 162,000 customers, a 16% increase over 2021.
What's more important is the growth in its large customers. Since 2019, the number of large customers (which Cloudflare defines as those with $100,000 or more in annualized revenue) has grown at a compound annual rate of 57%.
These customers are very important because they have an outsize effect on Cloudflare's top line. In 2022, large customers accounted for 61% of total revenue. Even more impressive is that the larger the customer, the quicker the growth.
|
Customers with annualized revenue of: |
CAGR from 2019-2022 |
|---|---|
|
$500,000 or more |
63% |
|
$1 million or more |
71% |
Data source: Cloudflare
It's clear that the company is attracting large customers rapidly. Those customers are also spending more each year. In 2022, Cloudflare's dollar-based net retention rate was 122%, which means customers spent 22% more last year than they did in 2021. And 30% of the Fortune 1,000 are customers. So the company is providing value that attracts customers and drives them to spend more.
3. Cloudflare is moving toward profitability
While Cloudflare is not yet profitable on the basis of generally accepted accounting principles (GAAP), it has made some progress. In the fourth quarter of 2022, net loss per share was $0.14, a significant improvement from the $0.24 net loss per share a year prior.
On a non-GAAP (adjusted) basis, Cloudflare has been profitable for more than a year. Fourth-quarter adjusted net income per share was $0.06, compared to breakeven in the year-ago quarter.
The story behind all these numbers is a trend that's important for investors to know. Cloudflare has never had any problem growing revenue or its customer base. In its earlier days, it was sacrificing profitability to ensure rapid growth.
The last several quarters have shown that as Cloudflare scales up, it can make its way toward profitability. Assuming this trend continues, there will be more payoff for shareholders down the road.
