Cloudflare – the Network-as-a-Service Company

Boosted by solid 3rd quarter revenues, Cloudflare is finding its way in the midst of the crisis, solidifying its position on the market as a trusted partner for secure web traffic for its clients. But what do they do exactly and why did its stock surged 300% over the last year?

What is Cloudflare?

Cloudflare initially tried to solve on simple mission: finding the source of spam mail and solving the issue they caused. It then grew more and more, diversifying its services to now offer a complete web protection service to companies, protecting their networks and website from all forms of cyber-attacks as well as optimizing their performance at the same time.

Cloudflare aims to build a better internet. Its platforms accelerate online internet applications, all through the cloud, without any addition of hardware or software whatsoever. Not a single line of code needs to be implemented by their clients. All web traffic simply goes through their intelligent global network, which accelerates connection and gives a solid protection against cyber-attacks.

 

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How does it work concretely?

Well, although my reduced knowledge in network infrastructure does not permit me to understand it full, I’ll try to explain it to you with the same terms that led me to understand it myself:

Simply put, Cloudflare launched a series of platforms and software to accelerate the shift to “zero-trust” IT, an IT technique which requires a very strict identity verification for every person to get access to any resource located on a private network, regardless of where they are. The issue with the previous technique (“castle and moat”) was that although it was really hard to get in a network from outside – say, from your home or a café –, once the user was in, it was really easy to move around the network and steal or destroy everything. People that got it were trusted by default, which made a breach in the security fatal to the network.

 

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This means that everything is separated and put in different boxes that all need a key to be opened, and there is little lateral movement, making it very hard for hackers or viruses to take over an entire network.

Therefore, in their model, every user must go through the same VPN Cloud guard named WARP and through the Cloudflare gateway. Metaphorically, the network is the Fellowship of the Ring, the hacker is the Balrog and Cloudflare puts on Gandalf’s coat. The hacker shall not pass. The company also integrates multiples third party providers of identity management services – more epic magicians on guard. They also extended their services to third-party SaaS applications and offer free analytics for their users.

 

The vision of Cybersecurity

According to Michelle Zatlyn, Cloudflare’s co-founder and CEO, cybersecurity as we know it will not exist anymore in the future, and here is why: "You're going to get to a point where it's almost like the water treatment filtration systems: If you're connected to the Internet, you're going to connect through a cybersecurity network like Cloudflare or some others and we're going to cleanse it and make sure whatever's passing through us is clean."

The pandemic was the scene of more and more cyber-attacks, as people were working from home and not on their company’s secured servers. Platforms like Cloudflare thrived, as they were needed to be the filter of traffic. With success! "Although attacks are up, traffic is up, and there are new attack types, the solutions are a lot better and a lot more affordable today if you're a business having to defend yourself,” said Zatlyn. And she added: "I have a point of view that cybersecurity is going to be a thing of the past the next decade because I think technology is going to solve those problems but we're not there today. Today, it's a real serious threat for businesses."

 

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The company’s strategy: small first, cash second

Cloudflare has a philosophy of starting slow and moving up the market later. Instead of directly going for the biggest companies like many of their competitors do, Cloudflare prefers to launch a service at a very little cost, perfect it, and only then propose it to larger customers. This strategy is not only cost-efficient, but it also gives them access to smaller players that have the potential to become bigger customers with the years – a good way to create fidelity early on.

Although they have many hundreds of thousands of customers, only 100’000 are paying customers, most of them relatively small. The biggest contract they ever signed was $10 million a year, and none of their customer is responsible for more than 5% of their revenues. The platform also has much more first-time developer users, from 15'000 in Q3 2019 to 27'000 in Q3 2020. A slow growth based on rock-solid foundations.

 

About the stock and last quarter’s profits

The stock surged last week when the company announced better results than initially expected, topping Wall Street expectations. The stock had surged 11% after hours, up to $58 dollars a share. It kept rising and is now sitting comfortably at $65 at the time of writing. That is a 305% growth in a year. Solid. But according to many analysts, this solid growth also means that the stock is trading at a high premium.

 

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Revenues this year rose to $114.2 million vs. $73.9 million in the same quarter a year ago. The company reported a third quarter loss of $26.5 million, or 9 cents a share, which is better than the $40.9 million or 35 cents a share it reported for the same quarter last year. “Our third quarter represented many significant milestones including surpassing $100M in revenue, crossing 100,000 paying customers, and releasing more than a dozen new products and features,” said Matthew Prince, Cloudflare co-founder and chief executive, in a statement. Analysts forecast a loss of 5 cents per share on a revenue of $112.3 million for the last quarter. On a yearly basis, analysts estimate a loss of 17 cents per share on a $406.4 million

Overall, numbers are good as they are still in a growth-now profit-later phase, and we can see a clear progress since last year, with revenues increasing and net losses cut in half.

 

The company is still growing, but could be well on its way to disrupt the status quo and eat up some market shares from Amazon Web Services, Amazon's money farm.

 

Sources:

Cloudflare's website

Cloudflare stock rallies on better-than-expected results, outlook, in MarketWatch 

Why Cloudflare Stock Soared Today, in the Motley Fool

Cloudflare Revenue Surges 54%: Can It Maintain Its Momentum?, in the Motley Fool

Cybersecurity as we know it will be 'a thing of the past in the next decade,' says Cloudflare's COO, as security moves towards a 'water treatment' model, in Business Insider

Cloudflare Announces Third Quarter 2020 Financial Results, in Business Wire

Cloudflare Unfurls Secure Network as a Service Platform, in Security Boulevard

Cloudflare wants to run your web browser in the cloud, in Techradar Pro

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