BUY Call: A closer look at Cloudflare's (NET: NYSE) Market Positioning (PART 1)
Cloudflare is down close to 75% from its pandemic highs, but the company fundamentals suggest this is a software darling worthy of adding back to a high growth portfolio
What Does Cloudflare do?
Cloudflare is a web infrastructure and website security company that provides online services to protect and accelerate websites. The company was founded in 2009 and is headquartered in San Francisco, California.
Cloudflare offers a range of services including content delivery network (CDN) services, which improve website performance by caching content and serving it from a location closer to the end-user, and DDoS protection, which helps protect websites from malicious traffic. The company also provides a web application firewall (WAF), SSL/TLS encryption, and a range of other security features to help keep websites safe.
Cloudflare Is Used by 79.9% of all websites that rely on content delivery networks, making it clear that Cloudflare is a market leader amongst its peers such as Sucuri, Amazon CloudFront, Fastly, and Akamai.
In addition to its website security and performance services, Cloudflare offers a range of network and Internet services, including domain name system (DNS) resolution and a global network of data centers. The company operates one of the largest networks in the world, with more than 200 data centers in over 90 countries.
Cloudflare has a large customer base, including small businesses, e-commerce websites, media outlets, and government organizations, among others. The company has a reputation for providing reliable, secure, and fast online services and has received positive reviews from industry experts.
Cloudflare is one of the largest and most well-known internet security providers, but it may not be the biggest in terms of market share or size. The internet security industry is highly competitive, with many large companies and smaller startups offering similar services. Cloudflare is considered to be a major player in the industry, with a large and growing customer base, and a wide range of services and features that are highly regarded by users and experts alike.
Cybersecurity Market Trends
Cybersecurity is becoming increasingly important as technology continues to advance and the use of connected devices and online services becomes more widespread. As a result, organizations and individuals are taking steps to protect themselves against cyber threats, and the demand for cybersecurity solutions is growing.
Some of the key trends in cybersecurity adoption include:
Increased Awareness: The public is becoming more aware of the importance of cybersecurity and the risks associated with using the internet, which is leading to greater adoption of security solutions.
Cloud Adoption: The move to cloud computing is driving growth in the cybersecurity industry, as organizations look for ways to secure their cloud-based assets.
Artificial Intelligence: Artificial intelligence (AI) and machine learning are becoming increasingly important in the field of cybersecurity, enabling organizations to quickly detect and respond to threats.
Internet of Things (IoT): The growing number of connected devices in the Internet of Things (IoT) is increasing the need for security solutions, as these devices are often vulnerable to attacks.
Compliance: Companies are facing increased regulatory pressure to protect sensitive data and comply with privacy and security regulations, which is driving the adoption of cybersecurity solutions.
Overall, the trend towards greater adoption of cybersecurity solutions is likely to continue as technology continues to advance and the threat landscape evolves. Global cyberattack surged by 38% in 2022, compared to 2021. Recorded cyber-attacks on US organizations grew 57% Year-over-Year in 2022, while the figure was even higher in the UK (77%). In 2022, data breaches cost businesses an average of $4.35 million.
Analyst firm Gartner predicted that by 2025, 45% of global organizations will be impacted in some way by a supply chain attack. The cost of cybercrime is predicted to hit $8 trillion in 2023 and will grow to $10.5 trillion by 2025, according Cybersecurity Ventures' "2022 Official Cybercrime Report," sponsored by eSentire. By 2027, global spending on cybersecurity training will reach $10 billion, according to Cybersecurity Ventures. As the number of online users increases, insider threats are as equally significant as threats from outside the enterprise.
As technological advances in society continues to accelerate and businesses continue to adopt the digital world a record pace, the threat of cyberattack only increases and makes security spending a top priority for businesses around the world.
Cloudflare’s Secret Sauce
Cloudflare started as a content delivery network (CDN). It operates servers scattered worldwide; when a customer uploads something to one of Cloudflare's servers, it's cached on the network. When someone accesses the content, the server closest to the access point will deliver the content, resulting in faster load times.
On its own, a CDN isn't necessarily unique; Cloudflare has competitors like Fastly and Akamai Technologies. But Cloudflare has steadily integrated internet, security, and computing services into its network, elevating its product beyond a simple CDN.
Back in the day, you would buy individual products and services for each function of operating online. But as you can see below, Cloudflare wants to integrate everything into its network and rent out an all-in-one package to customers.
Image source: Cloudflare.
Offering more services within its product will not only pack more value for customers (and provide a competitive moat) but will also give Cloudflare more growth opportunities through cross-selling. In 2018, Cloudflare estimated its total addressable market at about $32 billion. But that could grow to $135 billion by 2024.
Considering trailing-12-month revenue is just $894 million, there's a potential greenfield of growth ahead.
It comes as no surprise that the highly-talked about ChatGPT is powered by Cloudflare. iCloud’s Private Relay service is also powered by Cloudflare. Within the million busiest sites, Cloudflare has jumped from 3rd to 1st place — overtaking both Apache and Nginx in a single month.
More to come.
Disclaimer: This commentary is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice.