Cloudflare (NET 1.44%) -- an emerging leader in next-gen internet infrastructure, cybersecurity, and cloud-based app development tools -- remains on a solid growth trajectory. Despite a big slowdown for many cloud-based software companies in 2023, Cloudflare had a solid showing with full-year revenue growth of 33% to $1.3 billion.
Artificial intelligence (AI) has been at least some of the fuel sending the stock higher, but the stock is ramping up much faster than actual business expansion. Shares have more than doubled in value since the start of 2023. That has some wondering if the stock is getting more hype than is warranted.
Is Cloudflare stock a top buy right now, or should investors wait for a potential bubble-popping pullback?
Cloudflare's outlook for 2024 implies good things
Long gone are the days of Cloudflare putting up revenue growth of 50% or more. That's not surprising. This isn't a small tech business anymore.
But that doesn't mean Cloudflare's go-to-market strategy -- making new tools for small businesses and individual developers, perfecting those products, and then moving on to larger customers -- isn't paying off anymore. On the contrary, the early guidance for 2024 is solid.
|
Financial Metric |
2024 Outlook |
Implied Growth from 2023 |
|---|---|---|
|
Revenue |
$1.648 billion to $1.652 billion |
~27% |
|
Adjusted operating income |
$154 million to $158 million |
~28% (up from $122 million) |
|
Free cash flow |
$154 million to $158 million |
~30% (up from $120 million) |
|
Shares outstanding |
358 million |
~4% (weighted average of 344 million) |
Data source: Cloudflare. Implied growth percentages are based on the midpoint of 2024's outlook.
A record number of large users (those who pay at least $100,000 a year) of the Cloudflare platform were added at the end of 2023. CEO Matthew Prince said its large customer base ended 2023 at 2,756, up 35% from the year prior. And after spending much of 2023 realigning the sales team to drive better efficiency, management thinks 2024 will be a great year.
But what about the slowdown and valuation?
Of course, as solid as the 2024 outlook was, it still implies yet another slowdown in Cloudflare's growth trajectory. And this is a business still not much focused on generating a robust profit. Generating profit is the long game, assuming Prince and company feel they have ample fuel to keep expanding (that's exactly how they feel).
Perhaps AI will keep the party going. The market seems to think so. A couple of years ago, Cloudflare signed an agreement with Nvidia to plug accelerated computing infrastructure into Cloudflare's global data center footprint to fuel new use cases for developers. The service suite, dubbed AI Workers, seems to be going well and contributing to revenue growth.
But implied revenue growth dipping below 30% for 2024, at least at this early stage of the new year, is something to keep an eye on. Because at this point, even though Cloudflare is starting to generate a little profit, it's still such a small amount as to be meaningless in any valuation assessment (over 200 times the initial outlook for adjusted operating income and free cash flow for 2024).
My current take is the same as it was for much of the last two years. This is an incredibly promising cloud and edge-computing company. But at this juncture, investors need to reconcile the high premium based on this being a high-growth business for many years to come, with the real possibility that growth does continue to slow. Cloudflare is a stock most investors should tread lightly with, or build a position in gradually over time using a dollar-cost-average plan.
