The cybersecurity company taking on Amazon and Microsoft


Did you know that on average about 72 billion cyber attacks are being launched every single day? While the number is mind-boggling as it is, it could be just the tip of the iceberg, according to recent industry reports.

Given the complexity and lightning speed of cyber attacks, and the potential financial damage to businesses and personal data that they can cause, it's no wonder that cybersecurity is gaining more attention these days.

One company that is making its mark in the cybersecurity space is Cloudflare (NYSE: NET). The San Francisco-based company listed on the New York Stock Exchange on September 13, 2019, with the share price trading at US$18. As of early this month, the share price was trading in the low US$90s. This means that initial investors have been rewarded with hefty returns over the past 18 months.

cloudflare cyber security

What is Cloudflare and what does it do?

Cloudflare is a web infrastructure and website security company created by Matthew Prince and two other co-founders. Backed by a computer science degree, Prince and his co-founders started the company with the initial goal of helping other small businesses to protect, fortify, and speed up their websites.

Since its creation, Cloudflare had successfully protected some big corporate clients from cyber attacks. One of the high-profile cases was Wikipedia which became a victim of a Distributed Denial of Service (DDoS) in 2019. The attack meant European users were not able to access the site for several hours. The attack was mitigated after network engineers used Cloudflare's network and DDoS protection services.

Though a denial of service may sound esoteric to non-tech savvy people, you only need to imagine how disruptive it would be not being able to use your email or access the internet for a day. No email. No Facebook access. No checking of your online portfolio statement. It's clear how critical a cybersecurity service is to ensure that everyone has uninterrupted access to everything they need online.

Aside from the hardcore network security services, Cloudflare also provides content distribution network services, which is being used by individual website owners as well as businesses. According to Cloudflare this service now supports more than 25 million websites.

While it's a relative newcomer in a highly competitive industry where its rivals include the likes of Amazon and Microsoft, Cloudflare has garnered a lot of support and recognition for its technology offering and innovation.

Given that the company's technology and services are being used by global companies using distributed networks, Cloudflare operates in 200 cities around the world.

The Wall Street Journal has recognised Cloudflare as the Most Innovative Internet Technology Company for two successive years. Cloudflare was named on Entrepreneur Magazine's Top Company Cultures 2018 list and ranked among the World's Most Innovative Companies by Fast Company in 2019.

Financial results

During its third-quarter (Q3 2020) period, Cloudflare reported US$114.2 million in revenue, representing an increase of 54% year-over-year. The company has an estimated market capitalisation of about US$25 billion.

  • Gross profit - US$87.2 million, or 76.3% gross margin, compared to US$57.9 million in Q3 2019.
  • Operating loss -US$21.3 million, or 18.6% of total revenue, compared to US$41.1 million in Q3 2019.
  • Cash flow - US$2.0 million, compared to negative US$17.8 million in Q3 2019.

The company also recorded strong customer growth, adding a record of roughly 100 net large enterprise customers in the quarter.

In his interview after the quarterly results, Matthew Prince, co-founder and CEO of Cloudflare said: "Our Q3 represented many significant milestones including surpassing $100 million in revenue, crossing 100,000 paying customers, and releasing more than a dozen new products and features."

Prince, who offered Cloudflare's services for free to US state and local governments during the recent presidential election, added: "I'm incredibly proud that we exceeded financial, customer, and innovation milestones, all while providing our services, at no cost to ensure that cyberattacks don't disrupt the US 2020 elections."

Cloudflare's share performance

Despite a retreat in price in the month after listing in 2019, subsequent activity has been largely positive. The global dip in share prices in March 2020 was a short-lived blemish for Cloudflare which recovered quickly from the low close of March 16 at US$15.92. A nearly uninterrupted rally from here saw the stock probe above US$43 by early August. A brief correction in early September 2020 was quickly rejected by the market and subsequent gains saw an acceleration of the upward trend.

Between December 2020 and early February 2021, prices consolidated in a wide band between the high US$80s and low US$70s but a clear break higher on February 8 saw the stock push to a new record high, probing above US$95. A modest increase in trading volume accompanying the break higher suggests widespread support for the move. With upward momentum remaining firm, we anticipate further gains for Cloudflare in the months ahead.

Industry outlook

The global cybersecurity services market was estimated to be worth around US$66.86 billion in 2019 and growing at an annual rate of 9.4%.

Given the increasing need for cyber protection in almost all industries and sectors, the cybersecurity market is expected to grow to US$91.09 billion in 2023 at a rate of 8.0%. Growth is expected to continue at 10.4% to nearly $110.99 billion by 2025, and then to $182.32 billion by 2030 according to an industry research firm monitoring the cybersecurity sector.

As more business processes and services move to online and digital platforms, cybersecurity is expected to get more attention and budget from companies and governments alike. This means that websites and computer networks will need even more protection from cyber attacks.

Considering the company's impressive performance over the past year and its solid record of signing up big corporate clients plus its innovative technology offerings, we believe Cloudflare is well-positioned for growth. We consider it a buy.

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Alex Douglas is managing director of Monex Securities Australia (AFSL 363 972), and is responsible for the overall growth of Monex in this region. He has held senior executive positions with numerous financial services companies both in Australia and Asia over the past three decades. Early roles in the industry included being a foreign exchange voice broker, a trader on the floor of the Sydney Futures Exchange and a senior analyst with Standard & Poor's in Singapore.  Alex is a Certified Financial Technician (CFTe) and former board member of the International Federation of Technical Analysts (IFTA) as well as a sought-after author, speaker and market commentator.