To The Moon

As ChatGPT has become a focus of attention in the market, what other industries have the opportunity to continue to grow in the limelight? Cloud services have always been an important development in the online world. Through $Cloudflare, Inc.(NET)$   excellent Q4 performance, I have organized the following thoughts for investors' reference.

What are the business services?

Cloudflare offers multiple technologies, such as cloud storage solutions, application security solutions, and network scalability services. Customers pay service fees on an annual or monthly basis through a subscription model. Simply put, website-related businesses can use this service to improve user experience and address information security issues.

* Content Delivery Network (CDN) Service: Cloudflare's CDN helps websites and applications load faster by storing and delivering content from its global data center network.

* Distributed Domain Name System (DNS) Service: Cloudflare's DNS service provides an alternative to traditional DNS systems that is faster, more secure, and more reliable.

* Security Solutions: NET provides a range of security solutions, including Web Application Firewall (WAF) and Distributed Denial of Service (DDoS) protection to help protect websites and applications from network threats.

Q4 Performance

In the fourth quarter, total revenue was $274.7 million, an increase of 42% YoY. For the 2022 fiscal year, total revenue was $9.752 billion, an increase of 49% YoY, with a gross margin of 78.0%. The Q4 operating cash flow, operating profit margin, and free cash flow all hit historic highs. The cash flow was $78.1 million, accounting for 28% of total revenue, and the free cash flow was $33.7 million, accounting for 12% of total revenue. This shows that despite the headwinds in the broader environment, Cloudflare still has a good performance and a growing ecosystem.

The amount of free cash flow can evaluate whether a company has the capital to reinvest, create new opportunities, and even pay off debt or implement stock buybacks to enhance shareholder equity. I believe that Cloudflare will follow the "Amazon" model and differentiate itself from other CDN service providers.

Leading peers

As network security threats become increasingly complex, choosing the appropriate security level for the CDN is crucial and depends on the type of data stored and transmitted between servers. Fastly and Cloudflare both offer extensive security features, but Cloudflare has an edge in this regard because it has achieved the highest score in various security standards. Cloudflare has a dashboard that makes it easier to view various aspects of the CDN, making it more user-friendly than Fastly in this regard.

​Stable Revenue Growth

Cloudflare has a market value of about $21 billion, while Fastly has about $15 billion, and Akamai has about $13 billion. In the past five quarters, Cloudflare has been able to maintain a quarterly revenue growth of over 40% on a quarter-over-quarter basis, demonstrating its sustained strong business momentum. Although it has declined in the past three quarters due to changes in the overall environment, Cloudflare's cash flow has been even more stable. In comparison, Fastly's revenue growth rate on a quarter-over-quarter basis for the first four quarters was around 20%, while AKAM hovered around 0%, and their revenue growth cannot compete with the big brother.

Future Upside

With the increase in online activities and the dominance of hybrid work culture, AI intelligent applications, network threats, and related crimes are also increasing, as evidenced by recent cyber incidents involving Taiwan and Youbike rental services, which illustrate the importance of network security. According to Embroker, IoT network attacks are expected to double by 2025. Business operators are looking for intelligent software solutions to protect their valuable online data. This surge in demand will bring considerable profits to cloud service companies, such as Cloudflare, whose gross margin is around 70%. Akamai, Cloudflare, and Fastly will all see huge growth in this trend. I have positioned myself around $55 and continue to monitor revenue growth momentum and cash flow performance. Cloudflare will be able to move beyond its own operational model.

Conclusion

As an investor, I believe Cloudflare is well-positioned in the growing market for cloud services due to its stable revenue growth and its ability to provide effective solutions for network security. The increase in online activities and the need for hybrid work culture will increase the demand for cloud services, particularly for companies that provide solutions for network security. Cloudflare's high gross margin and strong revenue growth momentum make it a promising investment opportunity. I will continue to monitor the company's cash flow performance to ensure that it remains financially stable.

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