This channel’s about building wealth through stock investing so we can live the life that we want. I share all the details of my 6 figure portfolio including buys & sells, dividend income, portfolio performance, as well as my process to analyze and monitor stocks. Also, we break down market news and events without all of the hype and noise.
Hi Matt - love your show...I never miss an episode. But I have to admit, I'm scratching my head on this one. Between the slowing growth, intense competition, lack of profitability and stock based compensation, I'm not sure this investment is for me. When there are so many other opportunities, why would you want to invest in Cloudflare? The best you can hope for is a buyout from a larger firm who likes their technology.
Hi Bob thanks for the kind words. I'm going to paste part of my response to someone else here, since it's relevant... While I understand the "slowing revenue growth" since I talked about it in the video, I do think things need context. It's still more interesting to look at a company with "slowing revenue growth" of 50% to now 30% than a company with "accelerating revenue growth" from 6% to 8%. Let's not confuse "slowing" with "slow growing." For moat - Morningstar rates them as having a Narrow moat. For me personally, I simply ask this...name me another company that has over 16% of the total internet traffic going through their servers, about 20% of the total sites using their services, has 95% of global internet connected users within 50ms of one of their datacenters and provides an enterprise grade suite of cloud security, application services, and developer platform for anyone from free to enterprise users? To me this is much more than a buyout only opportunity. If you're going to use a platform for network security, would you want to use the one that has the most unique data on total internet traffic to understand patterns? If you're working on applications that need the speed, reliability, and security to be run at the edge all over the world...who would you use? Now imagine all those things are in one provider. Ultimately, every stock doesn't need to interest everyone. That's why we have markets and we can each have our own strategy and what we feel comfortable with putting our money into.
I appreciate the deep analysis you provided here. It was very informative but is well outside my circle of knowledge. I love that there are always opportunities in the broad market across various industries that may be more or less familiar for some individuals vs. another.
Agreed, was talking to someone else in the comments about this. Area of expertise / competence should also be considered (at least to a point) for these type of things
I dont see much in this video that makes me think this stock will outperform - you actually spent a good deal of time pointing out shortcomings like not GAAP profitable, slowing revenue growth, crowded competition, SBC. I just dont see the need to buy this particular growth company when theres other options
Few things in response... I always spend a good amount of time on the shortcomings and risk of every stock I evaluate. Because that's the most important part of the stock analysis. Every stock has trade-offs, no stock is perfect. I mentioned multiple times in the video that operations fundamentals and valuation are areas that need to improve but that my interest in them is the long-term growth potential in their business. While I understand the "slowing revenue growth" since I talked about it in the video, I do think things need context. It's still more interesting to look at a company with "slowing revenue growth" of 50% to now 30% than a company with "accelerating revenue growth" from 6% to 8%. Let's not confuse "slowing" with "slow growing." In terms of "rightful winner in the space they compete in" what does that mean? Who is the rightful winner? What space are you asking about? For moat - Morningstar rates them as having a Narrow moat. For me personally, I simply ask this...name me another company that has over 16% of the total internet traffic going through their servers, about 20% of the total sites using their services, has 95% of global internet connected users within 50ms of one of their datacenters and provides an enterprise grade suite of cloud security, application services, and developer platform for anyone from free to enterprise users? If you're going to use a platform for network security, would you want to use the one that has the most unique data on total internet traffic to understand patterns? If you're working on applications that need the speed, reliability, and security to be run at the edge all over the world...who would you use? Now imagine all those things are in one provider. Ultimately, every stock doesn't need to interest everyone. That's why we have markets and we can each have our own strategy and what we feel comfortable with putting our money into.
it's not so much that (I don't mind it being small) it's more about me having a limited amount of time to invest into creating and interacting. So instead of Discord and a newsletter, I may just do it in public on Twitter instead, etc. Too many things and places to look and ways to get distracted.
Hey Matt, fun to see you going outside of the box on this one. When you do videos like this one, would be great to have an intro with your personnal relationship with the stock, why you looked at it and picked it. To me since i dont work in tech, all of their products are totally outside of my circle of competence. Its very technical so i wouldnt be able to understand their progress at all.
This is a really interesting point actually. I'm going to think about this, because there is definitely value in that and it's not something I talk about often. My background is in payments and technology, so those are areas where I'm very comfortable. It's funny because when you see some of the stocks I've sold (WM, WMT, HSY, CAT, VLO, UNH) they are businesses that I'm less familiar with from an experience standpoint. I talked about that specifically with UNH and VLO when I sold. There's been quite a bit of folks who are like "you're changing your strategy" or "I don't understand why you're picking this" but to me my strategy has been the same, I'm just now picking stocks that I think actually fit my goal of market beating returns, and happen to be in areas where I feel like I'm more knowledgable. I feel better than ever about my portfolio, and that is likely a big reason why. FYI in terms of Cloudflare, I've used them before for websites that I've supported and while I was more on the programming and payments side of tech, I worked with networking and security folks to at least have a basic idea of what those things are. For instance, where I was we used F5 hardware for routing (one of the other companies I talked about in the video) so I was at least familiar with some of what they do.
@@mattderron very interesting, that makes way more sense to me now why you picked this stock. Thanks for sharing your background it helps! My background is more industrial, manufacturing, consumer and retail products. Clearly the stocks i own in those sectors are easier for me to understand and hold for the long term.
not sure I understand...part of the cash was from the McDonald's sale? Also, my trimming of McDonald's was due to believing they will have some headwinds going forward and wanting a smaller allocation to it in my portfolio so I have a better chance at market beating returns
@mattderron I guess I just thought of that stock as a buy and hold. I believe you had the cash in your treasury to do your trades without selling. So i just dont understand why to sell? Im trying to learn as much as possible while im still young 😂
I see that people don't really agree with you, but i think the points they make are not valid, like the one talking about 50% growth, i think it is very bad to do analysis like that throwing a number out of your ass. As you said they have a build it and they will come model in which pricing comes after, the risk would be if they dont manage "to build it" or if they they won't be able to make their customers stay after they start with the prices. This is an investment that will require a lot of conviction and I hope it will work for you
Agreed, it's a more speculative investment than say...buying Amazon. That was kind of the point. It's definitely generated a lot of discussion which is cool. I try to put business prospects first and valuation last, not everyone does it that way though
So, maybe this is a silly question, but do you understand how someone would become a customer of Cloudflare? When I think about a company like Netflix or Meta or Disney, it makes sense to me how they get their money (either directly from individuals, or from advertisers). It’s also pretty clear to me how individuals can become subscribers or companies could sign a contract to be an advertiser. For the charts that you showed at 20:30 and 21:30, would it be correct to assume those “customers” are basically “websites”? Like, there’s 200,000 websites that pay cloudflare for something and 2,000 websites that pay cloudflare over $100k per year. I think that makes sense, but I guess if I was going to invest in Cloudflare I would want to understand what causes a website to become a customer of Cloudflare. I made a website once (a while ago, so things might work very differently now), but I just payed Google yearly to keep it running so all my money went to Google. Did all of those 200,000 websites stop paying Google and “switch” to Cloudflare over the last few years? Or is Cloudflare relying on Google/AMZN/MSFT to tell its customers: “hey you might like these new Cloudflare features, would you like to add that to your yearly subscription?” Or maybe people still pay Google, and Google turns around and pays Cloudflare. These all seem like pretty different business models (in the first two cases the number of customers seems important, but in the last case it’s just seems important to have GOOG/AMZN/MSFT as your customers). Sorry for the long question, I guess my two cents is that I hope you understand Cloudflare’s customer acquisition process/flow since you have invested.
Are you not worried that their Levered FCF has been fairly stagnant over the last 6 quarters while their SBC has still risen? If you subtract SBC from their cash flow they're losing money! I wish you the best as always, but I don't really get this one (and that's fine). 🍀
Why do you say levered FCF is stagnant over the last 6 quarters? It’s up 74% YoY from the most recent quarter. In terms of SBC, I talked about that in the video as an area they need to improve
My new strategy is simply investing in the s&p500 and whenever there is an opportunity I will take it. I’m referring to opportunities like meta and Netflix in 2022. I think doing this will easily outperform the indexes
Does this company have anything special that a bigger company like AMZN would buy them? If it’s just another “me too” small fish company, how can they compete?
16% of all traffic going through their servers, most used CDN in terms of number of sites, significant web security market share. To me that’s a differentiator that doesn’t even include future edge processing
It's surprising because it's in a highly competitive market so no MOAT, unprofitable, no dividend, high valuation, how does this align with your strategy? High uncertainty that they will gain significant market shares, but who knows? I might watch you in two years and this one will be your best performing stock if they keep growing like they do!
I disagree that they have no moat (Morningstar actually rates it as Narrow). I see their distribution network and switching costs as that narrow moat. 16% of all internet traffic going through their servers with free plans available. I don’t think that can just be recreated. But it’s not a wide moat yet. Levered FCF growth CAGR is 90%+ so while they are not profitable and have a lot of SBC, their cash flow generation is trending in the right direction. While I agree there is a lot of uncertainty with them, they already have significant market share in the CDN and network security areas. For them it’s a growth and profitability story though, so we’ll see what happens.
yup, and when you combine those many services for "free users" the switching costs from free to anything else is well too high. Obviously they will have competition at the top end of the market, but the idea is that by that time you love the suite of products so much you don't want to leave.
I give them credit for one thing. In my Microsoft alumni account and I think in my current company’s GoVisually account, when there’s an error or identity check, it does run through cloudflare. I put it right back on my watchlist when I saw that. But I wouldn’t buy any over $75 and not sure if I want to buy it while all these other stocks are on discounts
With the current FCF yield of 0.7%, if it grows it 50% YOY for 5 years, it will only be at 5.3%. The company needs a miracle to justify current valuation. I would wait for a better opportunity to enter this stock.
I just bought zscaler yesterday at 158$ not sure if it will be the greatest price we will see but I really like the high insiders ownership and at around 10x sales.
@@mattderron The new products/services they want to offer in order to substantially grow their revenue are relatively immature to the competition. You can do some research see feedback from users who evaluated their new stuff compared to competitors. In highly competitive market, I would want to go with the #1 provider I think better risk vs. reward.
Which product / services are you talking about though? For edge computing, Forrester ranked them as the best platform based on the combo of long-term strategy + current features. If you're talking about SASE, then yes. But the difference is that not all of the SASE companies are competing in the full suite (CDN, edge, etc). Let me know if I misunderstood what products you're talking about. Who is the #1 provider?
I invested $100 into various brokerage platforms. The 3 I like the most are M1, Fidelity, and Robinhood. Vanguard has new CEO and that should bring changes maybe to their platform aswell. Schwab definitely needs changes to attract younger investors.
Wish this was the first video YT recommended me. You’ve come a long way, as a 19 year old I say thank you. Thinking of recording my journey just like you, but we’ll see what happens.
That’s awesome. Yes we’ve come a long way. You should absolutely record it. You don’t even have to share it on RU-vid. At a minimum record it for yourself. You’ll probably be glad you did!
@@mattderronwhat I think will be the biggest issue/hurdle is people that constantly tell me idk what I’m talking about, kind of like how people tell you your not a “real long term investor”. Any advice?
@@drdarkpk2430 yes, ignore them. Create your plan, monitor your progress, adjust as you learn. What anyone else says doesn’t matter at all. The reason I show those things so much is that people understand it happens to everyone and it’s meaningless
