Cloudflare (NYSE: NET) has been a rollercoaster for investors since its 2019 IPO at $15, soaring to an all-time high of $217.25 on Nov. 18, 2021, before settling around $108. Despite a decline from the peak, a $50,000 IPO investment would now be worth about $360,000 — a commendable return.
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The rise and fall, though turbulent, raise an intriguing question: Could Cloudflare’s stock surge to new heights in the future? Let’s delve into the prospects of this volatile growth stock and whether patient investors could transform a fresh $50,000 investment into $1 million over the next two decades.
What Cloudflare Does
Cloudflare’s content delivery network (CDN) accelerates the delivery of digital content, protects websites from cyberattacks, and recently introduced Workers AI — a platform for speedy AI app development. Powered by servers in 310 cities across 120 countries, Cloudflare processes 55 million HTTP requests per second. Amid this, its revenue swelled at a compound annual growth rate (CAGR) of 44% from 2020 to 2023, attracting over 2,756 large customers paying over $100,000 annually.
Cloudflare’s Growth Trajectory
While Cloudflare continues to expand, its revenue, large customer base, and year-end dollar-based net retention rates have ebbed over the past two years. Macro headwinds prompted a slowdown, yet analysts anticipate a 28% and 29% revenue surge in 2024 and 2025, respectively, outpacing its competitors like Akamai and Fastly. Despite the deceleration, it remains a prominent player in the rapidly growing CDN market.
Unpacking Economies of Scale
While Cloudflare’s revenue growth is losing steam, its adjusted gross margins have remained high, and it achieved profitability on a non-GAAP basis in 2022. Forecasts for 2024 predict a rise in adjusted operating margin to 9.5%, reflecting sustained earnings growth and potential economies of scale — hinting at the promise of future GAAP profitability as stock-based compensation expenses moderate.
The Path to a Million Dollars
At 192 times forward earnings, Cloudflare’s stock may not be considered cheap at present. However, if it can sustain a 20% CAGR in its bottom line over the next 20 years, achieving adjusted EPS of $20 by 2043, a forward price-to-earnings ratio of 50 could translate to a $1,000 per share value, turning a $50,000 investment into nearly $500,000. While this may not guarantee millionaire status, it suggests that Cloudflare has potential within a well-diversified investment portfolio.
Before investing in Cloudflare…
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Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Cloudflare and Fastly. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
