Cloudflare (NYSE:NET) CEO Matthew Prince may be the smartest executive of the cloud age. He’s not a techie, but a lawyer. He helped launch the cloud services company 12 years ago from Project Honeypot, a website that tracks online fraud and abuse. NET stock went public in September 2019 at $15 a share. Last week, it hit an all-time high of $196.80.
With a market cap of over $62 billion and expected 2021 revenue of just $632 million, some analysts are warning investors to stay away. Yet, so far, NET stock just keeps going up.
I have been guilty of this myself. If you took my advice from a Sept. 28 article and held off buying NET stock, you’ve missed a 70%-plus gain.
Cloudflare Disrupting the Disrupter
Cloudflare started with the idea of using hackers to create security. That became a successful edge development platform, which could guarantee applications bandwidth along with security. Now it’s working to give hints to bots and thus improve search engine results.
But what really has folks excited is what I call the “cloudless cloud.” The idea, which Prince calls Web3, uses the technology of distributed cryptocurrency networks to support cloud storage.
This means content doesn’t have to sit in an Amazon (NASDAQ:AMZN) Web server, paying a fat toll to be exported. It can live anywhere. Amazon calls its storage service S3. Cloudflare calls its service R2, and it’s disrupting the disrupter.
Cloudflare gives customers pricing power against the clouds’ biggest-margin business. It also gives the edge of the network the power of the core.
The Sweet Musk of Success
The latest move higher in Cloudflare came at the same time Tesla (NASDAQ:TSLA) soared to a $1 trillion market cap and it’s ever so loosely related. Just as Tesla disrupted the auto market, Cloudflare is disrupting the cloud with R2.
Cloudflare is scheduled to report third-quarter results on Nov. 4. Analysts expect a small loss on revenue of $166 million. A year ago, revenue was $114 million.
What has investors excited is the long runway of growth ahead, created by Prince’s innovations. While profits may still be a ways off, full-year revenue is expected to jump 47% in 2021 and another 34% in 2022.
If Cloudflare makes it to $632 million in 2021 revenue, you’re paying nearly 100 times sales for NET stock. That’s likely why analysts are skittish, with only 6 of 13 saying it’s a “buy.” And their average price target is 23% below the current price.
Yet, Cloudflare shares have been rising against this wall of worry. They’re up 96% so far in 2021 and 187% in the past year. Over the past two years, you’re talking about a nearly 800% gain.
The Bottom Line on NET Stock
Earlier this year, Prince said the world was experiencing an “unparalleled amount of cybersecurity activity.” More recently, he warned that cryptocurrency exchanges are now a popular target for hackers.
But Prince isn’t just watching these trends and reporting on them. He’s using the innovations of hackers against them. Not only that, but he’s attempting to improve the internet as a whole, making it more competitive and balanced.
I’ve said before that I bet the jockey and not the horse. A corporate story is nothing without a genius riding herd on it — one who can understand what they’re seeing in simple terms and take advantage. That’s Matthew Prince, that’s Cloudflare, and that’s why otherwise rational people are paying almost 100 times sales for NET stock.
I’m sure plenty of investors out there are asking whether it’s worth buying NET stock at current levels or if they should hold off until the next dip. But what if that dip never comes? That’s life on the bleeding edge.
On the date of publication, Dana Blankenhorn held a long position in AMZN. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn.
