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Cloudflare (NYSE:NET) Posts Better-Than-Expected Sales In Q2, Stock Jumps 22.3%


Full Report / August 04, 2022
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Internet security and content delivery network Cloudflare (NYSE:NET) beat analyst expectations in Q2 FY2022 quarter, with revenue up 53.8% year on year to $234.5 million. Guidance for next quarter's revenue was $250.5 million at the midpoint, which is 1.43% above the analyst consensus. Cloudflare made a GAAP loss of $63.5 million, down on its loss of $35.5 million, in the same quarter last year.

Cloudflare (NET) Q2 FY2022 Highlights:

  • Revenue: $234.5 million vs analyst estimates of $227.3 million (3.15% beat)
  • EPS (non-GAAP): $0 vs analyst estimates of -$0.01 ($0.01 beat)
  • Revenue guidance for Q3 2022 is $250.5 million at the midpoint, above analyst estimates of $246.9 million
  • The company lifted revenue guidance for the full year, from $957 million to $970 million at the midpoint, a 1.35% increase
  • Free cash flow was negative $4.41 million, compared to negative free cash flow of $64.4 million in previous quarter
  • Gross Margin (GAAP): 76.2%, down from 77% same quarter last year

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.

Cloudflare runs a large network of data centres around the world that serve as storage for their customers' content, shielding it from malicious attacks and delivering it in the fastest way possible.

The power of the product is in its size, used by tens of millions of internet properties, it is so big that it can protect customers even against state-sponsored attacks. And the massive volume of data flowing through the network allows their machine learning algorithms to improve every day.

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.

Cloudflare competes in the market for network and content delivery services with companies like AKAMAI (NASDAQ:AKAM) or Fastly (NYSE:FSLY) and partly with cloud cybersecurity and vendors like Zscaler (NASDAQ:ZS).

Sales Growth

As you can see below, Cloudflare's revenue growth has been exceptional over the last year, growing from quarterly revenue of $152.4 million, to $234.5 million.

Cloudflare Total Revenue

This was another standout quarter with the revenue up a splendid 53.8% year on year. On top of that, revenue increased $22.3 million quarter on quarter, a very strong improvement on the $18.5 million increase in Q1 2022, and a sign of acceleration of growth, which is very nice to see indeed.

Guidance for the next quarter indicates Cloudflare is expecting revenue to grow 45.3% year on year to $250.5 million, slowing down from the 50.9% 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 38.3% over the next twelve months.

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, licenses, technical support and other necessary running expenses was at 76.2% in Q2.

Cloudflare Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.76 left to spend on developing new products, marketing & sales and the general administrative overhead. Despite the recent drop, 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.

Cash Is King

If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Cloudflare burned through $4.41 million in Q2.

Cloudflare Free Cash Flow

Cloudflare has burned through $99.9 million in cash over the last twelve months, a negative 12.2% free cash flow margin. This low FCF margin is a result of Cloudflare's need to still heavily invest in the business.

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 a market capitalization of $19 billion and more than $1.64 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 excited to see that cash burn decreased. On the other hand, there was a deterioration in gross margin. Overall, this quarter's results seemed positive and shareholders can feel optimistic. The company is up 22.3% on the results and currently trades at $71.51 per share.

Is Now The Time?

When considering Cloudflare, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. There are a number of reasons why we think Cloudflare is a great business. First, its revenue growth has been exceptional. And while its cash burn raises the question if it can sustainably maintain its growth, the good news is its very efficient customer acquisition hints at the potential for strong profitability, and its impressive gross margins are indicative of excellent business economics.

The market is certainly expecting long term growth from Cloudflare given its price to sales ratio based on the next twelve months is 17.0x. Looking at the tech landscape today, Cloudflare's qualities stand out, and it is not hard for us to argue that the multiple is well deserved. We like the stock at this price.

The Wall St analysts covering the company had a one year price target of $89.7 per share right before these results, implying that they saw upside in buying Cloudflare even in the short term.

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