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Cloudflare (NYSE:NET) Reports Upbeat Q2 But Stock Drops


Adam Hejl /
2021/08/05 4:27 pm EDT
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Internet security and content delivery network Cloudflare (NYSE:NET) reported Q2 FY2021 results beating Wall St's expectations, with revenue up 52.8% year on year to $152.4 million. Cloudflare made a GAAP loss of $35.5 million, down on its loss of $26.1 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) Q2 FY2021 Highlights:

  • Revenue: $152.4 million vs analyst estimates of $146 million (4.33% beat)
  • EPS (non-GAAP): -$0.02 vs analyst estimates of -$0.04
  • Revenue guidance for Q3 2021 is $165.5 million at the midpoint, above analyst estimates of $157.3 million
  • The company lifted revenue guidance for the full year, from $614 million to $631 million at the midpoint, a 2.76% increase
  • Free cash flow was negative -$9.78 million, compared to negative free cash flow of -$2.22 million in previous quarter
  • Gross Margin (GAAP): 77%, in line with previous quarter

“We had our strongest quarter ever as a public company, and our revenue growth continued to accelerate, growing 53% year-over-year. We also added a record number of large customers, signing the equivalent of more than two six-figure customers every single business day in Q2.” said Matthew Prince, co-founder & CEO of Cloudflare.

Founded in San Francisco in 2009, Cloudflare is a software as a service platform that helps improve security, reliability and loading times of internet applications and websites.

The demand for Cloudflare is being driven by the massive technological shift from on-premise hardware to services in the cloud. Because almost any online business that is based in the cloud can benefit from Cloudflare’s services, the company is well positioned for the ongoing transformation.

Sales Growth

As you can see below, Cloudflare's revenue growth has been exceptional over the last year, growing from quarterly revenue of $99.7 million, to $152.4 million.

Cloudflare Total Revenue

This was another standout quarter with the revenue up a splendid 52.8% year on year. On top of that, revenue increased $14.3 million quarter on quarter, a solid improvement on the $12.1 million increase in Q1 2021, and happily, a slight re-acceleration of growth.

Analysts covering the company are expecting the revenues to grow 34.3% over the next twelve months, although we would expect them to review their estimates once they get to read these results.

There are others doing even better. Founded by ex-Google engineers, a small company making software for banks has been growing revenue 90% year on year and is already up more than 400% since the IPO in December. You can find it on our platform for free.

Profitability

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, licences, technical support and other necessary running expenses was at 77% in Q2.

Cloudflare Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.77 left to spend on developing new products, marketing & sales and the general administrative overhead. This is 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. It is good to see that the gross margin is staying stable which indicates that Cloudflare is doing a good job controlling costs and is not under a pressure from competition to lower prices.

Key Takeaways from Cloudflare's Q2 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 market capitalisation of $37.2 billion and more than $1.03 billion 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 glad that the revenue guidance for the next quarter exceeded analysts' expectations. Zooming out, we think this was a good quarter and shareholders can be satisfied. The company is down -5.96% on the results and currently trades at $114 per share, as the expectations of the market were probably even higher.

Cloudflare may have had a good quarter, so should you invest 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 full report which you can read here, it's free.

One way how 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.