We’ve been doing tech a long time and we don’t get excited about much. We still don’t have the fiber to the home line that in 1997 we were told faithfully by, oh, everyone, that we would have in 1999. So forgive us if we take everything hypey and futurey with a giant pan of salt and a big ol yawn. Whatever it is that your favorite FinTwit bod is telling you about their overweight, levered-up bag-HODLing stock this week, we can tell you, we heard it all before and it still hasn’t happened. So when assessing tech stocks we lean numbers and we lean charts. Between the numbers and the charts that doesn’t leave much room for romance. Our motto is, invest and trade like you be dead inside. Leave your feelings at the door along with your politics.
But sometimes, just sometimes, even we get pumped about something. And that something ladies and gentlemen is none other than 2020 FinTwit darling, Cloudflare ($NET). You know, Akamai for the modern age. (You see? Seen it all before. Yawn.). Fastly but a bit better and less hypey. Right? Great Covid work-in -your-PJs stock. Off the boil now everyone that isn’t retiring early
is being dragged back to the office by their double-vaccinated boss who hates being home so much they are making you leave yours just to make their own fractious family relationships seem normal.
We have news. We think this $NET thing is the real deal. For all the boring numbersy stuff, our most recent free non-subscriber note is here
and our Q1 earnings review for subscribers is here
. For the purposes of this newsletter which is supposed to be a little easier to digest than our usual analytical gumph, we’ll leave you with a couple points arising from the earnings call after the close Thursday.
One, growth in recognized revenue growth is accelerating. This is one of very few tech companies that is doing so right now. And it’s not like it’s accelerating from 10% growth. It just turned in Q1 ‘21 vs Q1 '20 growth of +51%, up a point from Q4 vs Q4.
Two, remaining performance growth (RPO) is accelerating. RPO is the total book of contracted business. And boy is it accelerating. First up, in Q4 it grew at +75% vs Q4 '20. And in Q1 it grew at +88% vs Q1 '20. The total RPO book is equivalent to 92% of TTM recognized revenue right now. So we have a big ol chunk of yet to be recognized revenue which is growing at 88% p.a. whilst recognized revenue is growing at 51% pa. And that to our jaded eyes spells … more acceleration ahead.
Three, it just turned TTM EBITDA positive. We take no notice of EPS here. It’s not a real thing. It’s just a construct loved by the sellside. Now, EBITDA isn’t a real thing either but at least you don’t have to sweat about tax rates or depreciation rates or any of that nonsense. We define EBITDA as operating income + deprecation & amortization + stock based comp. TTM EBITDA margins at NET stood at 3% in Q1. Not much. But positive. The same number was -32% back in Q2 '19. So it’s come a long way.
Four, change in working capital was positive. We won’t bore you with the guff behind that statement. What it means is, the company is starting to manage its cash properly, and it has been lax in the past on this front. We complained about their previously habitual cash leakage into working capital when we last spoke to NET’s IR people so no doubt they acted on our criticism. Pretty sure we’re top of their speed dial list.
Five, they have $643m net cash in the bank, enough to weather a storm or two.
So the numbers? They’re good. And the stock has been unceremoniously dumped along with everything else in tech that isn’t Microsoft or Google. So it’s looking less expensive. But here’s the thing that got us all pumped. Founder & CEO Matthew Prince said, and we paraphrase a little but only a little, “we want to be the #1 application development environment of any kind”. Not, “the best edge toolkit”. Not “the fastest CDN”. No, “we want to offer a platform where a single developer can write and deploy and run $1bn app by themselves, and we think that is closer to happening than people realize”. So he is telling you that he wants to own the development environment and the runtime for the Internet. Read that last sentence again. And realize that he means it.
On top of their basic acceleration service, on top of their DNS service, their in-network security services, and their intelligence-at-the-edge platform - oh and the fact that something like 16% of all internet requests flow through Cloudflare at some point … you know what that is? That’s Internet 3.0. And we believe Prince. We think he and his team can execute and do this. And we will remind you, we’re dead inside and never get excited about this kind of stuff. Why do we believe it? Because, one, the numbers. But mainly, two, because Prince is not a hype merchant. Normally Cloudflare’s earnings calls are all aw-shucks-what-us? and not in that annoying humblebrag way but for real. And what we got this week was, in a nice way, hey, can everyone get out of our way while we get this done. And when you get that from a not-hypester, that’s when to get excited in our experience.
So, at Cloudflare, the red light is on. We know that feeling. We love that feeling. That’s what keeps the CPUs churning here at Cestrian late into the night. The red light, burning bright. Out the way while we do this.
Good enough for us. Now, we already own a bunch of NET stock across our various staff personal accounts, and we can tell you we’ll be adding to those holdings in the coming days. Internet 3.0. You heard it here first.
Cestrian Capital Research, Inc - 6 May 2021.
DISCLOSURE - Cestrian Capital Research, Inc staff personal accounts hold long positions in NET, MAXR, FSLY, MSFT.