At first we though of Cloudflare (NET) as an internet performance-management platform. But the company is more focused on security than pure performance. If you didn’t read our note on Fastly (FSLY) you probably should do that: Fastly Joins the New Enterprise SaaS Group. 

Their value proposition is that they provide greater security, performance and speed than can be delivered by network hardware (ala Cisco, F5, Palo Alto Networks, Juniper, Riverbed, FireEye.) Their platform provides common solutions like intelligent routing and load balancing but does so in the cloud without any dedicated on-premise hardware.

The roadshow is a little off key because it talks about cloud computing as if it just started. It’s clearly already a very large business and the default method for software development and deployment today. But still Cloudflare has built their systems from the ground up to use commodity hardware so it is truly a “software-defined-network SDN” aimed at cloud computing.

For customers Cloudflare functions as a content-delivery network very much like an Akamai (AKAM) but for applications. [How Akamai failed to adapt to capture this market is a massive blunder. I blame the comfort of being an incumbent and enjoying the fruits of past success – they have a bloated SG&A so everyone is making plenty of money there despite missing these new opportunities.]

Cloudflare offers developers a platform of services all aimed at delivering their application with higher performance, better reliability and strong security in the cloud. Specifically product categories included: content delivery, smart routing, load balancing, DNS, content optimization, streaming, DDoS protection, and rate limiting to name a few.


This is a competitive market and Cloudflare is one of about two dozen companies in the space. There are long-standing public players like Akamai (AKAM) and Limelight Networks (LLNW) and the big cloud players like Amazon with AWS. You can see a long comparison of features from the guys at CDNPlanet. It’s interesting to note some advantages for Cloudflare:

  1. Although their offering is very similar to AWS CloudFront they are substantially bigger and broader in terms of servers. NET has 157 network nodes compared to 64 for AWS. This isn’t the only dimension to compare but it’s relevant.
  2. Cloudflare is lower cost with much simpler, budget-friendly pricing models. Amazon as usual is cheap but it takes a spreadsheet to figure out what it will cost you. Other services like Fastly (FSLY) also take this calculator approach.
  3. Cloudflare is in China. The other major operators including AWS are absent there.  You’ll need an “Enterprise” contract to use it which helps increase contract sizes at multi-national companies.
  4. Speed is a big advantage for Cloudflare. They can sign up a customer instantly with self-service and their network is faster than the rest. This is a big advantage over companies like Akamai. We discussed this in our note on Fastly. See Fastly Joins the New Enterprise SaaS Group.

We’re sure this one will be compared to FSLY in terms of growth, margins and valuation so we’ll get a comparative analysis done soon to add to the discussion.

Valuation & Stock Conclusion

Investor demand for the IPO has been strong and the company increased the proposed filing range from $10-12 to $12-14 and is on track to price tonight and trade tomorrow.

Our PFV model below indicates there remains some real upside and this one should get a premium valuation in the group. It’s being priced at the same P/S as FSLY.



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