Cloudflare: Genuinely Disruptive
Seeking Alpha – Richard Durant
Cloudflare’s network provides a differentiated set of capabilities that are being used to enter new markets. This provides Cloudflare with a strong competitive position, although this is still not widely understood. Cloudflare’s current valuation appears stretched given near-term headwinds, but the stock should do well over the long run. Richard Durant Cloudflare noted a downturn beginning in the fourth quarter of 2021, which it was able to identify early due to its exposure to internet traffic and ecommerce. Cloudflare’s management now believes that the market has rebounded somewhat, with their pipeline improving in the third quarter of 2022 and strengthening further in the fourth quarter. There is still uncertainty around the conversion of opportunities into ACV though. Customers are pursuing smaller deals and sales cycles are lengthening due to increased scrutiny.

Wave 2 products – Zero-Trust While Cloudflare’s wave 2 products are maturing, they are still gaining traction in the market, and sales and marketing efforts need to improve. Wave 3 products – Workers, Storage Wave 3 products are nascent, and it will likely take time for these to become significant revenue contributors. Cloudflare has introduced a large number of services over the past few years, which may be a source of confusion. Many of these solutions have been bundled within Cloudflare One to drive go-to-market efficiencies and create a simpler value proposition. This bundling also broadly aligns with the services falling under SASE (WAN, SWG, CASB, ZTNA, and FWaaS). SASE is the convergence of wide area networking, and network security services like CASB, FWaaS and Zero Trust, into a single, cloud-delivered service model.

While Cloudflare has a solid zero trust solution, its competitive positioning in the space is still somewhat unclear. Within zero trust, a large part of Cloudflare’s current business comes from replacing on-premise infrastructure from vendors like Cisco (CSCO) and Citrix. Amongst modern solution providers, Cloudflare has specifically mentioned Zscaler (ZS), Netskope and Palo Alto Networks (PANW). Cloudflare must also make greater use of channel partners if it is to successfully compete in markets like Zero Trust. Channel partners only account for around 13% of Cloudflare’s revenue, compared to approximately 96% for Zscaler.

Cloudflare continues to attract new customers, and in particular, the company’s large customer count is growing quickly. This is reasonably impressive given Cloudflare’s exposure to smaller customers, which in general have been more impacted by the current environment.

Cloudflare’s net retention rate has ticked lower in recent quarters, which is somewhat disappointing in light of Cloudflare’s growing portfolio of solutions. This decline has nothing to do with churn though, with management stating that gross renewal rates are over 90% and remain as high as ever. This figure is quite impressive given Cloudflare’s exposure to smaller customers, and should improve over time as Cloudflare’s presence amongst larger customers increases and customers adopt multiple solutions.
Link: https://seekingalpha.com/article/4591261-cloudflare-genuinely-disruptive