The major stock market indices are still hovering around their all-time highs, but many of the biggest pandemic winners have started to fall back to earth. Shares of Zoom, Peloton, and Zillow, for example, have all crashed at least 65% from their pandemic highs.
Even after significant declines, growth stocks are still expensive. It's not uncommon to see unprofitable software companies trading for 50 times annual sales or more. One such company is Cloudflare (NET 1.44%), a global edge computing provider that's made a name for itself protecting and speeding up websites.
Cloudflare is growing quickly as customers flock to its platform. Over 130,000 paying customers produced third-quarter revenue of $172.3 million, up 51% year over year. Cloudflare now has 1,260 customers paying the company more than $100,000 annually. Those large customers are taking advantage of the ever-growing suite of products that Cloudflare offers on top of its core content delivery and DDoS mitigation services.
Cloudflare is valued at around $53 billion. With the company guiding for full-year revenue as high as $648 million, the price-to-sales ratio sits above 80. That seems crazy to me. Cloudflare's growth is solid, but it's not 80-times-sales solid. And the company is still producing big losses. Through the first nine months of this year, Cloudflare reported a GAAP net loss of $183 million and negative free cash flow.
But I like Cloudflare the company. Cloudflare's global network gives it incredible optionality, and it's leveraging that network to build out an application development platform. Serverless computing has been around for a long time, freeing developers from needing to manage infrastructure. Cloudflare is taking it to the next level, and it's moving incredibly fast.
Image source: Getty Images.
The next cloud giant
If you're a developer building a web application, you need a few things. Your static assets, like images and web pages, need to be stored somewhere. Some sort of backend to securely interact with data and any third-party APIs is likely necessary. And a database is required for storing and querying user data. Those are just the basics. A complex, heavily used app may use any number of other components.
A cloud platform like Amazon Web Services offers developers every cloud service they could ever want. But AWS is complicated. Pricing can be Kafkaesque, and because moving data out of AWS is expensive, switching costs are high. There are companies with the sole purpose of helping AWS customers manage and optimize their bills.
Managing a complicated array of cloud services is no fun, and neither is dealing with billing minutia. Cloudflare aims to solve both problems with its serverless development platform. It's been a few years in the making, but Cloudflare is now moving quickly to build out a platform that allows full-fledged applications to run on its edge network and seamlessly scale as needed.
Cloudflare Pages is Cloudflare's solution to hosting static assets. The basic version is free to use, offers unlimited websites, bandwidth, and requests, and can build and optimize sites using any popular framework. Pages makes use of Cloudflare's global edge network, so it's extremely fast.
Cloudflare Workers is the company's backend solution. Instead of spinning up and managing servers, developers can deploy chunks of code to Cloudflare's global network. Workers scales automatically with demand, and pricing is based on the number of requests. Cloudflare made a flurry of announcements related to its developer platform in November, including a much tighter integration between Pages and Workers. Developers can now work on the frontend and the backend together, deploying both to Cloudflare's network with ease.
Cloudflare doesn't offer a full-fledged database. Part of the reason is that building a database that's distributed all over the world is hard. But the company does offer two database-like products that can handle many use cases. Both are integrated with Workers and Pages.
Workers KV is Cloudflare's key-value storage solution. Data is distributed across Cloudflare's global network, although this process takes some time on each update, so consistency isn't guaranteed. For applications that need every user to always see the same data, Cloudflare's Durable Objects are the solution. A Durable Object is a special kind of Worker that can permanently store data, acting like a basic database. For applications that don't need to query data in complex ways, Cloudflare's data solutions fit the bill.
Making the cloud simple
For developers, the holy grail is not needing to worry at all about infrastructure and scaling. Developers want their applications to just work, no matter the load. They want their database to handle whatever is thrown at it without the need to fiddle with settings and configuration. They don't want to worry about what cloud region their application is running in.
Cloudflare's developer platform still has some shortcomings. There's no database solution on par with standard solutions, and Workers has some limitations compared to running servers. But as Cloudflare iterates on its products and launches new ones, its developer platform becomes a viable alternative to the major cloud platforms for a growing number of developers.
The global public cloud infrastructure market was worth $64 billion in 2020. Cloudflare now competes in that market, on top of its core business of protecting and speeding up websites. If there's any company that's "the next AWS," I think it's Cloudflare.
Despite the potential, I don't think paying 80 times sales for Cloudflare makes sense. But if the stock market tumbles and Cloudflare's valuation falls to a more reasonable level, I'll be jumping on board.
