Hello, Liberty. Interesting comments on Cloudflare which made me curious, so I had a look. There are two sides of the story, deep technology and financial. I admit I didn't look into the technology in great detail; I only do that if the company passes a simple financial test. The past two years that financial testis has been critical, regardless of the underlying technology.
Adding a different perspective to the technological view: Cloudflare has high debt and seems to run on a fragile edge. It needs increasing Capex to grow. Operating cash flow would be good, but Capex diminishes greatly the company's ability to pay back debt, which is $1.57b. The net cash of $80m seems too thin, too risky, especially in this time of rising interest rates.
Rather than re-write it myself, I'll just quote my friend MBI:
"Cloudflare issued a 0% ~$1.3 Bn 2026 convertible bond in August 2021. Since the conversion price is $191.34 (>3x current price), Cloudflare may, in fact, end up receiving "free money" from the generous convertible bondholders. Cloudflare reported ~1.6 Bn cash (and ~200 Mn net cash) on its balance sheet in 2Q'22"
Their balance sheet is quite strong, they have great unit economics, very sticky revenues in largely mission-critical areas (infrastructure, security, identity) and have said that they'll run about breakeven going forward, so the burn phase should be over. But if they're ever in trouble, the levers are in their hands to increase profitability, they've just been re-investing a lot through the income statement by hiring a lot but they can slow that down at their discretion.
Hello, Liberty. Interesting comments on Cloudflare which made me curious, so I had a look. There are two sides of the story, deep technology and financial. I admit I didn't look into the technology in great detail; I only do that if the company passes a simple financial test. The past two years that financial testis has been critical, regardless of the underlying technology.
Adding a different perspective to the technological view: Cloudflare has high debt and seems to run on a fragile edge. It needs increasing Capex to grow. Operating cash flow would be good, but Capex diminishes greatly the company's ability to pay back debt, which is $1.57b. The net cash of $80m seems too thin, too risky, especially in this time of rising interest rates.
😀
Hi!
Thanks for reading, and for writing!
Rather than re-write it myself, I'll just quote my friend MBI:
"Cloudflare issued a 0% ~$1.3 Bn 2026 convertible bond in August 2021. Since the conversion price is $191.34 (>3x current price), Cloudflare may, in fact, end up receiving "free money" from the generous convertible bondholders. Cloudflare reported ~1.6 Bn cash (and ~200 Mn net cash) on its balance sheet in 2Q'22"
Their balance sheet is quite strong, they have great unit economics, very sticky revenues in largely mission-critical areas (infrastructure, security, identity) and have said that they'll run about breakeven going forward, so the burn phase should be over. But if they're ever in trouble, the levers are in their hands to increase profitability, they've just been re-investing a lot through the income statement by hiring a lot but they can slow that down at their discretion.
Hi Liberty,
What sources would you recommend for understanding Cloudflare?
Hey,
MBI has a good deep dive here:
https://www.mbi-deepdives.com/net/
Muji has written a bunch about it here:
https://hhhypergrowth.com/tag/net/
MT Capital also wrote about them here:
https://mtcapital.substack.com/p/cloudflare-net
And I've written a lot about them too, often doing commentary around presentation and transcripts:
https://www.google.ca/search?q=site%3Alibertyrpf.com+cloudflare
I hope that's useful! 💚 🥃
Wow, thanks.
My pleasure!