Cloudflare Inc (NET, Financial) experienced a daily loss of -4.05%, and a 3-month loss of -4.78%, with a Loss Per Share of 0.67. Despite these figures, the question remains: Is the stock significantly undervalued? This article provides a comprehensive evaluation of Cloudflare (NET)'s intrinsic value, encouraging readers to delve into the analysis that follows.
Company Introduction
Cloudflare Inc (NET, Financial), a software company based in San Francisco, California, offers security and web performance services through a distributed, serverless content delivery network (CDN). Its edge computing platform, Workers, allows clients to deploy and execute code without maintaining servers. Despite the current share price of $62.92, the GF Value suggests a fair value of $142.02, indicating that Cloudflare may be significantly undervalued.
Understanding GF Value
The GF Value is a proprietary measure that estimates the intrinsic value of a stock. It considers historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line provides an overview of the stock's fair trading value. If the stock price significantly deviates from the GF Value Line, it may indicate overvaluation or undervaluation, affecting its future returns.
For Cloudflare, the GF Value suggests that the stock is significantly undervalued. Given its current price of $62.92 per share, the long-term return of Cloudflare's stock is likely to be much higher than its business growth.
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Evaluating Cloudflare's Financial Strength
Investing in companies with poor financial strength can lead to a higher risk of permanent capital loss. Therefore, it's crucial to review a company's financial strength before deciding to buy its stock. For Cloudflare, its cash-to-debt ratio of 1.09 is lower than 64.53% of 2752 companies in the Software industry. GuruFocus ranks Cloudflare's overall financial strength at 5 out of 10, indicating fair financial strength.
Cloudflare's Profitability and Growth
Investing in profitable companies, especially those with consistent profitability over the long term, is generally less risky. Cloudflare, however, has been profitable 0 times over the past 10 years. With a revenue of $1.10 billion and a Loss Per Share of $0.67 over the past twelve months, its operating margin is -17.75%, ranking worse than 72.02% of 2731 companies in the Software industry. Overall, Cloudflare's profitability is ranked 3 out of 10, indicating poor profitability.
Growth is a crucial factor in a company's valuation. The faster a company grows, the more likely it is to be creating value for shareholders, especially if the growth is profitable. Cloudflare's growth rate of 15.1% over the past three years ranks better than 65.69% of 2413 companies in the Software industry. The 3-year average EBITDA growth rate is 20.4%, which ranks better than 68.04% of 2009 companies in the Software industry.
ROIC vs WACC
Comparing a company's return on invested capital (ROIC) to its weighted average cost of capital (WACC) can also evaluate its profitability. ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. If ROIC exceeds WACC, the company is likely creating value for its shareholders. Over the past 12 months, Cloudflare's ROIC was -20.79, while its WACC was 13.44.
Conclusion
In summary, Cloudflare's stock appears to be significantly undervalued. The company's financial condition is fair, but its profitability is poor. Its growth ranks better than 68.04% of 2009 companies in the Software industry. To learn more about Cloudflare stock, you can check out its 30-Year Financials here.
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