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Originally Posted by Uggi
Hey logo I was an early follower of your NET posts back in mid-2020 and took a big plunge into it when the price was around $40. I cashed out everything at $190 - my best trade ever. Would like to thank you for that great tip. I have been buying in again recently at around $160 as I believe in the company. Just wondered where you were on this - holding or buying more?
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Glad to hear it! I’ve just been letting everything ride. My initial cost was $28 or something close to that, then doubled my position at the big dip last spring so my average is around $45-50.
Their forward 2022 P/S is about 45 at current pricing. On the high end, but their price-to-book value at current pricing is actually directly in line with huge established companies like TSLA and NVDA. From a value perspective compared to those, NET is growing 50% YoY with no stop in sight - the CEO has repeatedly indicated they have ZERO intent on generating positive cash flow for the next several years because every penny is getting reinvested into growth opportunities. From that perspective, does P/S matter? I honestly don’t know because it’s entirely dependent on when growth caps out. Many people cannot understand exponential growth, but at 50% YoY if you give them to 2025 that’s an annual revenue of $3B. Just 3 years, and revenue topping $3B. Give them to 2030 and that’s >$15B in annual revenue. Even with a P/S of 15 at 2025 that point is a cap of $45B, or pps of ~$120. At 2030 that’s a cap of $225B, or pps of $620. I’d argue a P/S of 15 would be unreasonable for a company operating at 50% YoY growth into the billions in revenue, and thus todays prices in my view are a bargain if investing for long term and you believe their growth can sustain, which I do.
I’m not an expert on interest rates in terms of how significantly a rising rate environment can push down P/S ratios for growth companies, but it’s also not likely we see rates go insane - we are talking about a rise off of historic lows.
If you look to competitors like AKAM, they have about $3B in revenue, cap of $20B. Half the cap of NET, but triple the revenue. Looking closer, AKAM focuses exclusively on large customers and in fact they only have 50,000 of them. Revenue growth is consequently quite small. NET on the other hand has millions of free and paying users and growing at 70% YoY for large paying customers. This is where they have a “Facebook” model of growth that is anchored in network effects which I suggest googling to truly see what cloudflare is doing.
Network Effects are essentially what makes a platform sticky? Grow your user base through free users, use them to rapidly iterate and test new tech before deploying to paying customers, and offer everyone something that they simply cannot get elsewhere. If you amass such a following, you become essential to functioning. Think about it this way - one person with a fax machine makes fax machines useless, even if that fax machine company sold it for $10B, the product/service doesn’t have a strong utility. However, 100 people with an internal corporate landline can be efficient in communication with each other. Not as efficient as a country with 300M cell phones, and not as efficient still as 7B with internet access. Power in numbers, where every additional user not only receives benefit themselves, but the whole network benefits AND those not in the network are incrementally motivated to join that network. That’s how FB took off, and THAT is why cloudflare is valued so strongly compared to peers - currently, 80% of all websites that use a CDN use cloudflare. It’s no surprise that cybersecurity is becoming increasingly important and that pull to cloudflare should continue. This, in combination with the continual agile value-adds they provide that compete directly with players like AWS, cloudflare is a winner long term.
All that to say, I am holding, and buying with eyes on 2030.