Either Cloudflare (NET 1.44%) possesses good timing or perhaps it's blessed with prescience. The provider of cloud-based services debuted on Wall Street in 2019 at $15 per share when cloud computing was rising in popularity. Mere months later the COVID-19 pandemic hit, and due to society's sudden need for cloud-based internet solutions to to take classes or work remotely, Cloudflare stock rocketed past $200 per share.
Its stock returned to earth since then. But on Dec. 15, Cloudflare shares reached a 52-week high after Fortune magazine listed the company among the top 10 businesses with long-term growth potential.
At this point, does it make sense to buy Cloudflare shares? Digging into the company in more detail can help to determine if now is a good time to invest.
Why Cloudflare's offerings attract customers
Cloudflare tackles the complex task of helping organizations maintain a digital presence. It does this by offering several cloud-based services centered around digital content delivery across an internet network that's fast, safe, and robust at a reasonable cost.
Every time you visit a website, your device retrieves it from a server in a data center, and the site must load quickly or you may not stick around. Cloudflare delivers speed through a network of data centers spanning over 100 countries around the globe.
Still, a robust network isn't useful unless it's safe and secure from hackers. So cybersecurity is also one of Cloudflare's offerings. Its network security was able to withstand a massive cyberattack generating the equivalent of all the internet traffic in the world.
Cloudflare's convergence of a cloud computing network and cybersecurity, referred to as a secure access service edge (SASE), proved another prescient move. SASE is expanding rapidly as more organizations transition to cloud computing.
The SASE market grew 30% in 2023 to $9 billion according to research firm Gartner, and is expected to reach $25 billion by 2027. Cloudflare's all-in-one SASE solution is already benefiting from this industry tailwind as demonstrated by the company's customer growth.
At the end of last year, Cloudflare reported more than 160,000 paying customers, nearly double the number it had after its 2019 initial public offering. Customers include U.S. government agencies shedding multiple vendors in favor of Cloudflare's all-in-one offering.
Cloudflare's success
This customer growth translated into rapidly expanding revenue. In the third quarter, Cloudflare generated sales of $335.6 million, a 32% year-over-year increase.
Its strong Q3 results were the latest in a multiyear trend of rising revenue.
Data by YCharts.
The company's sales growth is expected to continue. For the fourth quarter, Cloudflare is forecasting double-digit year-over-year revenue growth of at least $352 million, up from 2022's $274.7 million.
The company's free cash flow (FCF) is also strengthening. FCF provides insight into the cash available for Cloudflare to invest in its business, pay debt obligations, and repurchase shares. Its Q3 FCF was $34.9 million compared to negative FCF of $4.6 million in the prior year.
Yet despite Cloudflare's successes, the company isn't profitable. Cloudflare exited Q3 with a net loss of $23.5 million. Because of its strong revenue growth, however, Cloudflare's lack of profitability isn't a concern at this time.
In fact, many tech companies operate for years without a profit as they prioritize growing their businesses. And a positive sign is that Cloudflare's Q3 net loss improved over the prior year's loss of 42.5 million.
Deciding on Cloudflare stock
And now, there's the advent of artificial intelligence. Cloudflare's prescient gifts came into play once more since, years ago, the company prepared its data centers to support AI's hardware needs. That foresight is proving beneficial.
Cloudflare's network can handle the complex tasks executed by AI systems. As a result, the company already has customers wanting to put billions of AI tasks onto Cloudflare's network. The company believes this customer demand will continue to increase, and Cloudflare's foresight preparing for AI gives it a competitive advantage.
Cloudflare also benefits from the tailwind of growth across multiple industries. The cloud computing market is expected to increase from $678 billion in 2023 to $2.4 trillion by 2030, which also boosts SASE's market expansion. In addition, the AI market is forecast to grow from $142.3 billion in 2022 to $1.8 trillion by 2030.
With growth in these industries and its strong IT infrastructure, Cloudflare is positioned to continue its success into 2024, making the stock a buy. Because Cloudflare shares hover near a 52-week high, it's worth taking a small stake now, then using dollar-cost averaging to add to your position later should the price dip.
