I’m particularly sad to see Cloudflare’s stock having plummeted.
Out of all the tech companies that IPO’d in the past few years, Cloudflare is one that the most potential to excel long term. Developer sentiment towards Cloudflare is comparable to Apple fanboys of the previous decade, and their products are legitimately good, backed with tangible assets (datacenters). They also have consistent growth quarter over quarter.
It’s surprising how many not as impressive companies (pre-revenue!) got away with entering the public market last year. Good company or bad company, they all seem to be sharing the same freefall.
Worth recalling there are >5 rate hikes priced in for the remainder of the year, and that the problem with CloudFlare isn't just the speculation, but for their legitimate business, the credit fuelling many of their customers, which are significantly concentrated in the tech sector. The coming tightening of hiring will also inevitably mean the tightening of infrastructure budgets. What built CloudFlare's excellent sales pipeline can just as easily obliterate it, but in any case will certainly leave at least a major dent.
It's probably a great time to be getting into finops, and I don't think CloudFlare's fair value is anywhere remotely near $18bn.
I think we'll discover before the end of this year just how many of the tech darlings were largely side effects of the poisonous sandbox constructed by the US fed.
Tightening of infrastructure budgets isn't often easy, you need to invest weeks of engineering time into a mere 6 figure yearly reduction in infra costs.
Aside from that, Cloudflare is growing revenue not just overall but also on a per-customer basis, due to the expansion of products.
Once Cloudflare releases products that allow it to more directly compete with AWS, it'll be repriced by investors. They've already stated that this is their goal. They're missing a compute product and a real database or KV store solution to be at the bare minimum. I think we'll see both, and at least one will happen in the near future.
Cutting infra costs is not easy, especially when the costs of lapsing security spend are so high (how much did Equifax lose on reputational damage + cleanup work?).
> I think we'll discover before the end of this year just how many of the tech darlings were largely side effects of the poisonous sandbox constructed by the US fed
?? Poisonous sandbox?
Is this an awkward way of referring to money printing? Or the low interest rate environment?
It's a bit awkward since "poisonous" usually refers to things you eat, and sandboxes or their contents are generally not eaten.
If you want to continue the sandbox metaphor, which I do like, "playing in the Fed's sandbox until the bottom fell out" might work. Or even "toxic sandbox".
I was thinking somewhere vaguely along the lines of easy credit as something like heroin addiction/withdrawal, that's where poison came from. I guess it is awkward
I liked it. Also because the markets have become decoupled from reality/fundamentals/value - like a sandbox - at this point. Also liquidity and fungibility of the money supply/sand =)
I quoted from Wiktionary, feel free to update the definition there (with sources) if you disagree. Note that the "Synonym: toxic" appears underneath the second (figurative) definition, and in my opinion is perfectly correct; in figurative use poisonous and toxic are used in the same way.
I think it works, toxins can transmit into the body not just through the ingestion route but also skin absorption among many other routes. So if there's toxins in the sand of the kind the skin is vulnerable to then that sandbox would be poisonous to the occupants.
https://www.cdc.gov/niosh/topics/skin/default.html#:~:text=D....
> If you want to continue the sandbox metaphor, which I do like, "playing in the Fed's sandbox until the bottom fell out" might work. Or even "toxic sandbox".
All toxic substances are poisonous. A toxin is a poison produced by a living cell or organism.
Poisonous Sandbox was elegantly simple, pithy even, and quite appropriate.
While "toxin" refers specifically to a poison produced by a living cell or organism, "toxic" does not -- it's a synonym of poisonous, directly derived from the Latin word for "poisonous".
"Toxin" is a newer invention, derived from "toxic" by adding the biochemistry-related suffix "-in" to indicate toxic substances of biological origin.
Seems notable that just today Uber's CEO sent a letter to everyone that said, among other things, that hiring is tightening. Just one firm, but a big well-known one.
Stock doing poorly -> public company CEOs want to please wall street by showing greater revenue -> layoff (employees are largest cost center for tech companies)
The purpose of interest rate hikes is to dampen demand. The less demand there is for goods and services, the less need there is for workers to provide them.
> The coming tightening of hiring will also inevitably mean the tightening of infrastructure budgets.
But cloudflare is also pretty cheap for many things, so that may bring in some more money from people downsizing from something like akamai, could it not?
Are you saying 18bn is way too high or way too low when you say ' lI don't think CloudFlare's fair value is anywhere remotely near $18bn?'
I know it's down a lot but I'm asking because it started from such a loft valuation
I have no opinion on NET but a lot of the cloud bubble stocks of the last few years needed to come down by 95 percent IMO to get closer to intrinsic value. To do that they'd first drop 90 percent, then drop another 50 percent from that point. Hence I don't know which you meant.
Some more respectable commentators suggest the current environment is the start of a second tech bust, and although that seems sensational, it might be fair given current trends of shrinking credit, de-globalization, explosive inflation and rapidly collapsing discretionary spending seen at present.
A reasonable starting point might be where it was prior to Covid QE and rate reductions (-61%), add one company-specific shock due to missed growth expectations (-30%), maybe +20% for real growth experienced over Covid in the meantime, and that already leaves us with $6bn, before accounting for the effect of the fed beginning to unwind their balance sheet (which starts in June, initially at around 1% per month)
Incrementally buying at $18-$25 would definitely feel tempting in that scenario, assuming the fed delivered its claimed targets, and only with the understanding the IPO price should not be considered a floor.
This is all before considering the reality their product isn't much more than a commoditized fly on the windshield of bigger vendors, and it's easily possible to imagine a Lightsail-like competitor appearing in the meantime.
> Out of all the tech companies that IPO’d in the past few years, Cloudflare is one that the most potential to excel long term
If you think this, you should be happy and buy more of the stock. I don't know enough to say if I think it's a good idea, but if you do, don't be sad, buy more of it.
This all gets a bit messy when trying to use a simple binary designation of "good" or "bad" to describe a company based on all factors about that company.
Good companies come and go. Good companies of old no longer exist because the world changed. Some companies are good for awhile, and then lose their way. Nuance abounds.
Not putting words in the parent commenter's mouth, but maybe a different way to say this is that Cloudflare is a good product. A product can be both great, and not viable under some conditions. The two are not mutually exclusive.
It's interesting to look at the list of 11 companies profiled by Jim Collins in his classic 2001 business book "Good to Great". How many of them are still considered great today? In other words, is being great at one point of any value in predicting long-term success?
Again, they aren’t a good company today if they can’t weather a down turn. They may have been a good company in the past, but they aren’t currently if they can’t make it.
What's your definition of a good company? If people could reliably predict which companies are and will remain good then they will be very rich. Most of us can only know in hindsight for the most part. This is why virtually no one picking individual stocks beat the S&P 500 index over the long run.
This is basically what I was getting at. Everyone has different definitions of "good" and to limit it strictly to "Survives the current market" is both limited and asking for abuse. E.G. I would argue there is absolutely nothing "good" about US health insurance companies, but they continue to be financially successful.
My belief in their goodness, or lack thereof, has absolutely nothing to do with their finances. It is the same reason I won't invest in Crypto currencies or NFTs. The line may be going up but so is the global temp. Not good.
I both agree with you, and sympathise with GP because I'm bad at following your/my own advice.
I suppose it comes down to conflicting opinions/strategies - I'd be way over-allocated in Amazon & Cloudflare (and probably 'tech' and the USA) if I always did.
Yes and no. You might not have cash to spare (especially in such a volatile period). Also, investing more might exceed your exposure limit to a single stock/industry.
Sure you should have a diversified portfolio but everything is also on discount. Warren Buffet went on a buying spree. If you don't have cash to spare thinking about investing isn't what you should focus on but instead doing basic financial wellness like having a savings account. Also cash has been outperforming the market so far so cash isn't necessarily a bad investment.
>If you don't have cash to spare thinking about investing isn't what you should focus on but instead doing basic financial wellness like having a savings account.
There are an incredible number of reasons why they might not be able to invest right now so perhaps it isn't the best thing to immediately goto implying they don't even have a savings account.
I'm a NET watcher/holder, I've read most of their earnings call transcripts and SEC docs since the S-1. IMO, they were way overvalued at their peak on fundamentals. With the recent slide, I think they're "far" undervalued, to an extent that varies based on how much value one attributes to present and future tailwinds that cannot be encoded on a balance sheet as future receivables.
Boiling it down, I think institutional investors do not fundamentally understand Cloudflare's technical raison d'etre.
As you implied, NET gets lumped in with its IPO class of "tech stocks", but is fundamentally different, for the reasons you gave. They have a legitimate moat, differentiated technical talent, and are fishing in a growing pond.
Similar to the Amazon story, it seems inevitable that a company shaped like NET is going to make oodles of money in the next ten years provided they have the right leadership and capital structures. NET has all that, and a several-years head start. On and up.
This may be the wrong place to ask, but if a regular person wanted to buy stock in an individual company or two, and mostly hold it (not day-trade), what's the right channel for that?
Lots of online brokers will let you trade individual securities. The used to be more fees associated, but lots of places now allow zero-fee trading as well. ymmv
Try buying $1000 worth of any stock and immediately selling again. Notice how you now only have $980. You effectively paid a $20 fee. It was just a hidden fee in the spread caused by whoever executed your trades.
There are two prices, the bid price (how much someone is willing to pay) and an ask price (how much someone is willing to sell). When you submit a market order, you usually get a price close to the bid (if you’re selling) or the ask (if you’re buying).
The 20$ difference you describe is the spread - not a fee taken by the brokerage, market maker, exchange. Whoever is executing your trade isn’t pocketing the 20$.
Then just don't execute both trades... and everyone can quote on the current bid or the ask price, you should do it too if you're afraid of crossing the spread.
Is that misinformation or not? Don’t market makers make their profits by collecting some difference between bid and ask? I recall a video from Warren Buffett explaining that it was criminal that firms like Robinhood get away with calling it zero fee trading.
The consolidated bid and the ask across all exchanges make up what's called the NBBO and every one (market makers, exchanges, etc) are required to give you a price equal to or better than the NBBO. So if the bid for SHOP is say $50.00, the ask is $50.10, and you are selling SHOP, its illegal for anyone to give you a price < $50.
Market makers make money by buying low and selling high (and vice versa). They typically look for small movements not large ones. So if a market maker bought SHOP at $50, they would try to sell it at $50.10. This is what everyone means when they say a market maker makes money off the spread.
This strategy works really well when you have large random order flow, which is why market makers want to pay brokerages for order flow. They incentivize brokerages, even ones that charge commission) by giving pfof (payment for order flow) and price improvement on top of the NBBO. This price improvement is passed on directly to the customer.
IIRC, brokerages have a best execution obligation. So they are required to try and execute orders in a way that gets customers the best prices. I don't know about other brokerages but at Robinhood, pfof wouldn't go into our order routing decision at all. We would send orders to the market maker using a model which only considered the historical price improvement they gave our customers.
Because Robinhood order flow is so lucrative for marker makers in aggregate, they were willing to give us really good price improvement. So the execution for options and equity orders at Robinhood be better than other brokerages (even ones you pay commission for)
I’m the cofounder of https://olainvierte.com - we released our stock trading app just days ago. We focus on financial education and long term financial health for Latin America but anyone is welcome :)
Cloudflare doesn’t own anything significant in the form of data centers. Having small rented footprints at IXPs across the globe is not an asset, it’s just a cost. I’m not downplaying the difficulty of getting it setup but there is no intrinsic value in having it if demand for their product collapses.
> Developer sentiment towards Cloudflare is comparable to Apple fanboys of the previous decade
This is far from true. People begrudgingly pay protection money to cloudflare to protect themselves from DDoS attacks. Very few significant operations depend deeply on the cloudflare stack. It has not been the AWS alternative it set out to be with the launch of its lambda like edge compute products.
An AWS, Azure, or Google DDoS protection product could eat Cloudflare’s market in a hot minute. Cloudflare can’t escape being a “feature” of a cloud provider.
(Disclosure, I sold out of Cloudflare at the end of the year when it failed to gain significant traction.)
Cloudflare doesn’t own anything significant in the form of data centers. Having small rented footprints at IXPs across the globe is not an asset, it’s just a cost. I’m not downplaying the difficulty of getting it setup but there is no intrinsic value in having it if demand for their product collapses.
I don't understand this point. If there's a risk that demand will collapse isn't it better not to own the data centers? By renting CF can reduce their costs quickly in the face of falling demand. That's a feature.
An AWS, Azure, or Google DDoS protection product could eat Cloudflare’s market in a hot minute. Cloudflare can’t escape being a “feature” of a cloud provider.
This is also true of any other software company though - at some point a bigger company might offer whatever product as a feature. It's just a risk of building a software company - what we build is largely straightforward to copy. That doesn't mean there's no value in software as a product though.
> there's a risk that demand will collapse isn't it better not to own the data centers? By renting CF can reduce their costs quickly in the face of falling demand. That's a feature.
But it’s not an asset. Do you know what an asset is?
> Cloudflare doesn’t own anything significant in the form of data centers. Having small rented footprints at IXPs across the globe is not an asset, it’s just a cost.
Akamai is the leading global CDN provider, want to guess how many data centers they own? Sure, owning a data center is an asset, but it’s also a liability too.
When whole species get torn down in one solar year bc some other species began to adopt a winning adaptation, that seems prone to overshooting (excessive curve fitting to the first derivative), with odd/suboptimal outcomes as no surprise.
$212M quarterly revenue with a $41M loss. In this climate you better have a solid PE as a public company or you’re in deep shit. This is the second dot-com bust. I worked at eToys for the first. $6B market cap and was delisted. Assets sold off for $2M when liquidated. Make no mistake about how bad things are about to get.
I lived through the dotcom bust, the financial crisis and now this. Long term it isn’t going to be any worse than they were. In 2-3 years we will be recovering. I feel bad for people who can’t wait out a market cycle, but that’s what this is, somewhat exacerbated by the Fed’s actions leading up to this point.
I get your point that everything always goes up eventually, but there will be unpredictable events that reshape the market like COVID, war, 9/11, hurricanes, and many other “one-time” events that we can’t even predict right now. Just because these things kind of happened at different times doesn’t mean 10 of these things won’t happen all at the exact same time or back to back for many years. Imagine having a COVID lockdown, on top of a fuel shortage, and a food shortage, on top of a war, on top of countries defaulting on debt. If even any two of those happened in lockstep it would spell disaster for many company’s as we know. We got lucky there wasn’t another major crisis during COVID lockdowns although to this day we are dealing with the supply chain issues created with strict lockdowns and China is still or really just starting now to lock down in a major way, so now the supply chain issues we had aren’t just on our side of the ocean but theirs as well. It’s a miracle it didn’t happen on both sides at the same time.
I believe it was ~13 years before the nasdaq reached the same level as the peak of the dot com bubble. I also find it odd to use the peak as the primary reference point. It was a brief moment in time. For example, if you had invested in the nasdaq in Feb 99 or Nov 2001, instead of Nov 99, it recovered in 7 years. If you started in Aug 98 it recovered in ~5 years. There was rough a window of a year where it would have been really bad to invest, but that is why everyone recommends dollar-cost-averaging (https://www.investopedia.com/terms/d/dollarcostaveraging.asp) instead of investing a ton all at once.
Ya'll are talking past each other. Since I made the comment, I will define my terms more precisely. In 2-3 years someone who consistently invests a fixed portion of their earnings/assets into a weighted vehicle/basket will be enjoying an appreciating net worth. I'm not claiming to be able to call the bottom, but I'm also not measuring "recovering" as peak-to-peak. Peak to peak would be past-tense "recovered".
Has the “pace of technology” really picked up in the last 10 years though?
In 2012:
- Apple and Google were the dominant mobile platforms
- Microsoft was dominant on the desktop
- Amazon was the dominant retailer and the dominant (but nascent cloud provider)
- Google was the dominant search engine and YouTube was dominant
- Facebook was the dominant social network
-Microsoft has been one of the top five companies by market cap since 2000 and Apple has been in the top 5 since 2011.
- Intel is still the top PC processor manufacturer.
If you saw a modern smart phone in 2022, would you really be impressed with the iPhone 12 ProMax compared to the iPhone 5s?
I was using a 2 year old Core 2 Duo 2.66Ghz Dell with 8GB RAM, gigabit Ethernet and a 1920x1200 (not a typo) screen. That computer can still run the latest version of Office and Chrome today.
In other words, the landscape hasn’t changed that much.
Now compare 2012-2002.
Have there been any new widely successful tech companies emerging since Facebook in 2009?
Amazon. AWS was just a small cloud on the horizon in 2012. They are the dominant platform to run applications and (more surprisingly) now the #2 DBMS vendor according to recent Gartner numbers. That's a major change. [0]
I know nothing about NET other than the 30seconds I just spent looking at their financials - they managed to triple their revenue over three years but they seemed to have managed to about triple their losses over the same time period and they trade at ~30x sales, MSFT is ~11x, guess people believe they’ll be earning a ~$2b/year in the next several years?
That startup math worked out fine until a few months ago.
The common wisdom was tech companies can always fire personnel when they will want to become profitable and until then increasing expense to get more market share is the thing to do.
It's not completely baseless but obviously we now know too many companies rode this momentum and built businesses that might be unsustainable. We will see.
I'm looking to get positions in Crowdstrike, ZScaler, Snowflake and Palantir if I can find good entry points. All have been too high to justify for the past couple of years.
I've been in Cloudflare since about $30 and sold about 20-30% when it was at $200, so I figure I'm playing with house money there and have no plans to sell at any point. I would like to buy back though.
I bought at the peak for cloudflare and had a similar thought process.
After losing 15-20%, I decided to sell. Figured I'd buy again after it dropped further. Guessing when it's 80-90% down from peak I'll end up repurchasing.
It's quite entertaining that when electronics and clothes go on sale people go buy buy buy, but when stocks go on sale people sell like crazy. People are weird.
A plummeting stock won't prevent Cloudflare from excelling, unless they are short of capital and have an urgent need to issue a secondary stock offering.
They can buy Oxide Computer and become a truly back-to-1997 retro-futuristic cloud company. Hindsight is 20/20. In gradient descent optimization, sometimes it is important to take backwards steps to get out of the local optima. We're going to look at AWS/GCP/Azure with the way manner we currently look at IBM/Cisco/Oracle. I also have no idea what I am talking about.
As far as them going bankrupt seems pretty unlikely as some people are saying. Remember - Paypal, Yahoo, Google, etc. amongst many survived through the dot com bust. Cloudflare can generate positive cashflows anytime they want by stopping future development.
Technology and society has ways to build up layers of abstraction. It takes some realization, hindsight, genius and humbleness to cut down the overgrowth and pick the fruits, plant new seeds.
So did I, after calling it on their IPO prospectus at the time. [0] It was a good ride from <$20 and still is a good stock to buy even at these prices now.
But at one point [1] it was hyped very quickly and had to sell most of it at >$200 after asking and reading the responses from this [1] it was really not a surprise to see through the hype at the time and why it crashed so quickly. [1]
You can have similar sentiments towards a lot of the companies. For example zoom, twilio come to mind. Point is all of them across the board have been inflated.
This is endemic of the problem of the current tech ecosystem. Emphasizing “growth” over “profitability”. Why is it surprising that a company that has loss money over the past five quarters is seeing its stock tank?
Agree, Cloudflare is doing some great stuff and always trying new things. Remember the Cloudflare TV Channel (if that still is around). I hope the loss in market cap doesn't hurt their innovation.
Out of all the tech companies that IPO’d in the past few years, Cloudflare is one that the most potential to excel long term. Developer sentiment towards Cloudflare is comparable to Apple fanboys of the previous decade, and their products are legitimately good, backed with tangible assets (datacenters). They also have consistent growth quarter over quarter.
It’s surprising how many not as impressive companies (pre-revenue!) got away with entering the public market last year. Good company or bad company, they all seem to be sharing the same freefall.
(Disclosure, I own NET)