Cloudflare (NYSE:NET) Q3 Sales Beat Estimates But Stock Drops 11.8%

Radek Strnad /
2022/11/03 4:24 pm EDT

Internet security and content delivery network Cloudflare (NYSE:NET) announced better-than-expected results in the Q3 FY2022 quarter, with revenue up 47.2% year on year to $253.8 million. The company expects that next quarter's revenue would be around $274 million, which is the midpoint of the guidance range. That was in roughly line with analyst expectations. Cloudflare made a GAAP loss of $42.5 million, improving on its loss of $107.3 million, in the same quarter last year.

Is now the time to buy Cloudflare? Access our full analysis of the earnings results here, it's free.

Cloudflare (NET) Q3 FY2022 Highlights:

  • Revenue: $253.8 million vs analyst estimates of $249.8 million (1.6% beat)
  • EPS (non-GAAP): $0.06 vs analyst estimates of $0.00 ($0.06 beat)
  • Revenue guidance for Q4 2022 is $274 million at the midpoint, roughly in line with what analysts were expecting
  • Free cash flow was negative $4.61 million, compared to negative free cash flow of $4.41 million in previous quarter
  • Gross Margin (GAAP): 75.5%, down from 78.2% same quarter last year

“We achieved an important milestone in the third quarter, surpassing $1 billion in annualized revenue for the first time. The opportunity we have in front of us is enormous. Even with this achievement, we’ve penetrated less than 1 percent of our identified market for the products we have available today,” said Matthew Prince, co-founder & CEO of Cloudflare.

Founded by two grad students of Harvard Business School, Cloudflare (NYSE:NET) is a software as a service platform that helps improve security, reliability and loading times of internet applications and websites.

The amount of content on the internet is exploding, whether it is music, movies and or e-commerce stores. Consumer demand for this content creates network congestion, much like a digital traffic jam which drives demand for specialized content delivery networks (CDN) services that alleviate potential network bottlenecks.

Sales Growth

As you can see below, Cloudflare's revenue growth has been exceptional over the last two years, growing from quarterly revenue of $114.1 million in Q3 FY2020, to $253.8 million.

Cloudflare Total Revenue

And unsurprisingly, this was another great quarter for Cloudflare with revenue up 47.2% year on year. But the growth did slow down a little compared to last quarter, as Cloudflare increased revenue by $19.3 million in Q3, compared to $22.3 million revenue add in Q2 2022. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Guidance for the next quarter indicates Cloudflare is expecting revenue to grow 41.5% year on year to $274 million, slowing down from the 53.7% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 37.2% over the next twelve months.

In volatile times like these we look for robust businesses with strong pricing power. Unknown to most investors, this company is one of the highest-quality software companies in the world, and their software products have been the default standard in critical industries for decades. The result is an impressive business that is up an incredible 18,152% since the IPO. You can find it on our platform for free.


What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Cloudflare's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 75.5% in Q3.

Cloudflare Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.75 left to spend on developing new products, marketing & sales and the general administrative overhead. Despite it going down over the last year, this is still a good gross margin that allows companies like Cloudflare to fund large investments in product and sales during periods of rapid growth and be profitable when they reach maturity.

Key Takeaways from Cloudflare's Q3 Results

Since it has still been burning cash over the last twelve months it is worth keeping an eye on Cloudflare’s balance sheet, but we note that with a market capitalization of $16.3 billion and more than $137.8 million in cash, the company has the capacity to continue to prioritise growth over profitability.

We were impressed by the exceptional revenue growth Cloudflare delivered this quarter. And we were also happy to see it topped analysts’ revenue expectations, even if just narrowly. Overall, this quarter's results seemed pretty positive and shareholders could feel optimistic. But investors might have been expecting more and the company is down 11.8% on the results and currently trades at $44.35 per share.

Should you invest in Cloudflare right now? It is important that you take into account its valuation and business qualities, as well as what happened in the latest quarter. We look at that in our actionable report which you can read here, it's free.

One way to find opportunities in the market is to watch for generational shifts in the economy. Almost every company is slowly finding itself becoming a technology company and facing cybersecurity risks and as a result, the demand for cloud-native cybersecurity is skyrocketing. This company is leading a massive technological shift in the industry and with revenue growth of 70% year on year and best-in-class SaaS metrics it should definitely be on your radar.

The author has no position in any of the stocks mentioned.