The dive into this cutting edge IT leader is a gift

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Cloudflare, Inc ( REPORT -4.36% ) is a cloud service provider that offers a wide range of solutions to customers around the world. The company is a leader in Edge Computing, Cybersecurity and Internet of Things (IoT) solutions. Cloudflare has been public since September 2019 and investors have been generously rewarded. An investment of $ 10,000 the day after the IPO would be worth over $ 100,000 today.

Cloudflare’s stated mission is to “build a better Internet” and it appears to be achieving it. Businesses thrive on efficiency, and slow-running applications aren’t just boring, they cost businesses money. The beauty of advanced computing is the speed. It turns out that data can only travel so fast through fiber optic cables, so distance is a factor in receiving data in a timely manner. Cloudflare has a data center in more than 250 cities and is within 50 milliseconds of 95% of internet users, according to the company. 50 milliseconds is literally several times faster than you blink. This is just one example of the differentiated and superior performance of Cloudflare products. They also fend off massive DDoS cyberattacks, replace your clunky VPN, secure email accounts, and replace on-premise hardware, among others.

Source: Getty Images.

The stock is experiencing a significant drop that may not last

As mentioned above, Cloudflare shareholders have enjoyed huge gains since the company went public. Lots of those that have happened in the past six months. Despite this, the market is currently going through a special after falling nearly 20% from the share highs. Concerns about inflation, interest rates and the stock’s valuation reduced the stock price.

Chart showing the price of Cloudflare over the past six months

Source: YCHARTS

The forward PS ratio is still above 90 despite the recent decline. That figure drops to 65 on a one-year prospective basis. No matter how you slice it, this rating is high. However, long-term investors can always be rewarded. Incremental buying is always advisable for high-end growth stocks to take advantage of short-term declines. This is not the first time that Cloudflare stock has fallen sharply. At the end of September 2021, the stock fell more than 17% with no news. He has since gained nearly 64%. Obviously, this fall was an opportunity to buy or accumulate stocks for sale.

Metrics support a business with an undoubtedly bright future

You can’t talk about a Software as a Service (SaaS) business without discussing three main metrics. First, a successful SaaS business must have a high gross margin. This allows the business to move towards profitability as sales and marketing expenses normalize. Cloudflare handily beats most of its competition with a gross margin of 78%. This is higher than other growing SaaS companies like CrowdStrike (CRWD -2.93% ), and Palo Alto (PANW 0.51% ), and identical to the very successful and more mature Service now ( NOW -0.77% ).

Then Cloudflare’s revenue is growing at a prolific rate. Revenue has grown by almost 50% every year for three years and is expected to grow another 37% next year.

Cloudflare Yearly Revenue Graph

SOURCE: Cloudflare, YAHOO

Cloudflare’s revenue is expected to more than quadruple between 2018 and 2022. That doesn’t even begin to tap into Cloudflare’s total addressable market, which the company expects to reach $ 100 billion by 2024. Market share by only 5% should lower its price. -the sales ratio (P / S) drops to only 12.

Finally, every successful SaaS company needs to grow its customer base, and quickly, due to the immense competition in the industry. Cloudflare has an impressive 132,000 paying customers at last report. The company also has a growing number of clients who generate more than $ 100,000 in annual recurring revenue. These customers have grown from just 451 in the third quarter of 2019 to 1,260 in the third quarter of 2021, representing a compound annual growth rate of 67%. Cloudflare also effectively monetizes customers. The 124% net retention rate indicates that Cloudflare is increasing the amount of customer revenue much faster than the customer churn rate.

Cloudflare has made a clear breakthrough in China

The Chinese market is fertile, profitable and extremely complex. To be successful, a business must manage political risk and deal with the strained relationship between the United States and China. Often, partnering with a Chinese company is the best way to be successful. JD.com (JD -9.90% ) is China’s largest retailer and has partnered with Cloudflare to bring data centers to more than 130 Chinese cities.

The verdict

There is no doubt that Cloudflare has short-term valuation issues. However, the long-term bullish case is strong. The company is growing its annual recurring revenue at a rapid rate, along with the customer base and revenue received from each customer. The gross margin is high and indicates scalability with a huge and growing TAM. The partnership with JD.com is expected to help increase the company’s presence in China. For long-term investors, the current decline is likely an opportunity to generate increased profits on Cloudflare stocks.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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