In our second episode, the Stock Jocks, George, Bruce and Gordon take a fresh look at Cloudflare, starting around (19:48). Recording date: March 17, 2024 (St. Patty’s day!)
In the news:
On Cloudflare (19:48)
In our second episode, the Stock Jocks, George, Bruce and Gordon take a fresh look at Cloudflare, starting around (19:48). Recording date: March 17, 2024 (St. Patty’s day!)
In the news:
On Cloudflare (19:48)
Say make money. Money, make money, money, money. Make money. Money make money. Money, money, money makes the world go round. I'm gonna talk around town. Remy
george_1_03-17-2024_155127 (1):Welcome in to Just The Tips with the Stock Jocks. You've got George, Bruce, and Gordon here for the much anticipated episode number two coming at you live. Guys, how are you going?
gordon--alpha-_1_03-17-2024_165127:You know there's a lot of stocks moving, run out there. Lots of money to be made. I'm not making it, but, it's exciting.
bruce_1_03-17-2024_185127 (1):I'm feeling as green as St. Patrick's Day, to be
george_1_03-17-2024_155127 (1):What a coincidence. It is St. Patty's Day, which reminds me Where's your green, Gordon?
gordon--alpha-_1_03-17-2024_165127:oh, it's just my underwear, my, my banana hammock. I guess you wanna see it for the YouTube. Since we're on YouTube now, I, usually gotta pay extra
george_1_03-17-2024_155127 (1):your tie is green,
gordon--alpha-_1_03-17-2024_165127:All right,
george_1_03-17-2024_155127 (1):I take it back. So
gordon--alpha-_1_03-17-2024_165127:my teeth are green. Hygiene's, not a salutation. All right, cool. I'm excited. Let's do this.
george_1_03-17-2024_155127 (1):it. So Gordon, I think you're leading this one. So we're gonna, hand it off to you to lead us through the desert here.
gordon--alpha-_1_03-17-2024_165127:Before we dive into, our main topic, which is CloudFlare, take your NET. I have the slide titled nothing but net. I'm pretty sure there's probably been seven sell side titles with that out there at some point or another. But before we do that, a little foreplay. Anyway, so disclaimer, before we go into that none of this should be considered investment advice. If you listen to us, you're an idiot. Do your own homework, talk to your financial advisor or your healthcare professional this is a contact sport, but yeah, it's for educational purposes only. Be safe out there. All right. But first in the news, I'm going to do it again. Sounds good. Second time. It
bruce_1_03-17-2024_185127 (1):was better the first
gordon--alpha-_1_03-17-2024_165127:was definitely a disappointment in my like middle name. So let's talk about super micro for a second. That was our topic last week. Obviously it was timely. I didn't know they were going to be added to the S& P 500 when I was talking smack about it but man they went from the small cap 400 to the S& P 500. And they were a rocket ship like in a single day, it was like 18%. Now they're up another, at the end of the day, they were finished at about 25 percent the last two weeks. So very exciting. So more, more technically than anything else, like that's not like supermarket is crushing it. They're not beating estimates more than they were before. It's literally just a demand situation where a bunch of fund managers now have to own this thing. So good for super micro Dell reported as an HP, by the way, on the same night, they love the torture cell ciders at Dell and HP. But they were up holy mackerel, 29 percent multiples are a little different
bruce_1_03-17-2024_185127 (1):do you think on Supermicro, do you think that it's, just their inclusion in the S& P 500? Or if it's become this Wall Street Bets kind of meme stock?
gordon--alpha-_1_03-17-2024_165127:I think that it's mostly the S and P 500 issue. I've seen this kind of move 20, 30 percent before. It's been running ever since then. It really doesn't get added till tomorrow. So all these managers are chasing it. It's just been like hanging out here, for the last week. So I think it's just that's the run people anticipating having to buy it. There was a journal article today about as how this new super micro is a new darling. And if you go through the comments, some very high quality research that we're doing here just adjust the tips. I'm going through the Wall Street Journal article comments. Kind of everybody hates it for what it's worth. It's just, everyone's got the valuation. You're just unbelievable. I I think I did margins lower in Q1 because of AI servers. That's great news. Profitless prosperity. Goldman initiated on super micro with a 941 price target, shortly after like in the average price targets like 881.
bruce_1_03-17-2024_185127 (1):Looking pretty spicy.
gordon--alpha-_1_03-17-2024_165127:yeah,
bruce_1_03-17-2024_185127 (1):I'll tell you, I'll tell you, Gordon, there's two things that are looking good here. One is. Charles is recently adopted stock plan in November of 23. I think he's hit every single target. And this plan was supposed to run until 2028 and he's hit him in the first six months. And my 500 target price for the company.
gordon--alpha-_1_03-17-2024_165127:How useful is that if it touches it and jumps down? I mean, like I'm
bruce_1_03-17-2024_185127 (1):I can tell you when to buy. I just can't tell you when to sell.
gordon--alpha-_1_03-17-2024_165127:okay Okay. You should have been a sell sider. And we were really good at claiming that we were right. It was amazing. Taking credit for stuff it's really important skill, but at the day, there's a lot of evidence out there that, liquid cooling, may not, it may not be sustainable. I was just doing some level of work and basically, liquid cooling technology, basically it's it's not standardized and it's very sort of servers, supplier specific and. That basically means that everybody's get, got to integrate with super micro, the chip vendors do. And then the OEMs have to be okay with that. And, these companies will not let server companies make money ultimately, if they can avoid it. And so they're inclined to multi source. And I just feel like this liquid cooling thing is a bit overblown. And I think others are probably realizing that too, but in the past, I've gotten very burned by, especially in the hardware field Oh, this is truly a different technology. Like maybe in semis, maybe in like networking or security, those boxes have a lot of software content, but not servers in my humble opinion. For what it's worth good for the folks, super micro they've gotten very rich and I'm happy for them. But I'm not chasing this one and the data points I'm seeing are not making me more encouraged. It's gotten more expensive. Full disclosure, I did put a put out there. It expires in June and it's got a strike price of 4. 50. I paid 8. 80 per per option and it's about 7 right now. So it was up 40 percent on Friday. So I got my seatbelt on. So we'll see, it's just I, you gotta play to win. This is clearly long term intelligent investing that I'm doing here.
george_1_03-17-2024_155127 (1):The Gordon anti portfolio is in play is what you're saying.
gordon--alpha-_1_03-17-2024_165127:yeah, that's great. Yeah. It was, again, I'm selling a lack of correlation. All right. Also, last time we talked about Palo Alto networks, we got some interesting data points. I think that you guys are more well versed in this. Maybe, uh, maybe George or Bruce wants to take this one, crowd uh, crowd swagger, Zscaler implications for pan for, did it help Palo Alto's case or not?
bruce_1_03-17-2024_185127 (1):Yeah, I can start with CrowdStrike maybe,
george_1_03-17-2024_155127 (1):it's good to recap to what Palo Alto said, what we talked about last time as well.
bruce_1_03-17-2024_185127 (1):Sure, yeah, so Palo Alto, from last episode basically said in no specific terms that they were seeing headwinds in the market effectively and that They had moved more to a strategy of what they call platformization, which I think most people have come to realize is really just bundling, which has been a term that's been used in the industry for decades. And effectively what they wanted to do is start giving away things for free for the next kind of six to nine months, which would, create a significant kind of near term headwind. It would create, a bunch of or a one time maybe multi time bookings hit here. And all eyes were really on CrowdStrike and Zscaler over the past couple of weeks because they're the kind of two biggest companies that are, the closest comps to, to Palo Alto networks in some ways, and also CloudFlare which we will talk about shortly. And so CrowdStrike and Zscaler both reported, and, I think that. The sentiment probably couldn't have been more diametrically opposed than what sort of Palo Alto had said, and they also both commented specifically on Palo Alto's statements around headwinds in the market and slow lists in the market and, their new strategy around platformization. So I think the couple things that I thought were really interesting about the CrowdStrike report was. In the first quarter they're basically seeing record deal volumes across the board. So in, in the fourth quarter of last year, they closed 250 deals that were over a million dollars in deal size alone. So they're seeing like real strength across their portfolio of products. And that's which leads to the second point, which is where, when they said that basically their cloud security identity protection and next gen SIM solution. So the bulk of a lot of products in their portfolios are basically big enough at this point where they could IPO each of those businesses and they could be a kind of standalone business, which is the playbook that CrowdStrike has run over the past, call it 10 years where they've basically been able to modularize all of their offerings and then cross sell those offerings really aggressively against Their enterprise user base. And that's led to this platform effect that has really allowed them to scale in both revenue and and usability across their enterprise base. And the last thing that they said was in response to Palo Alto, where George Kurtz, the CEO of CrowdStrike said, basically, as you might imagine, I heard a lot about platformization over the last week. To me, it's a made up for gazy term. And that's the actual word that he used. But what I believe our competitors is talking
gordon--alpha-_1_03-17-2024_165127:There's going to be another mention of Fugazi, by the way. I'm really surprised by this. This is the universe is trying to tell us something, but. Please continue.
bruce_1_03-17-2024_185127 (1):We got to have a fugazi word count here running on the, or fugazi ticker here running soon. But he said, but what I believe our competitors is talking about is bundling, discounting, and giving products away for free. Which is nothing new in software and security software. So it just goes back to show, this is a strategy that I think, a lot of people have deployed over the years. It's a new strategy maybe for how Palo Alto is thinking about the universe, but it certainly hasn't had any near term impact on their kind of closest competitors.
gordon--alpha-_1_03-17-2024_165127:When do they report? The term doesn't look great. They're basically up a percent. For all that shit talking, I'm not sure it bought him anything.
bruce_1_03-17-2024_185127 (1):It's yeah, no, yeah, that's a good point. So they, so the stock basically. Bounced upward, it went up about 10 percent after they reported. So people were really happy with earnings, but then it came back down to basically flat same with Zscaler after they reported, they were up about 10 percent and they came back down as well. I think it was 1 of these near term things. We'll talk about it later, but these, these scalar cloud flare crowd strike. Even Palo Alto to some extent or, probably in some ways fairly valued or as George would say maybe overvalued, but we'll get into that a little bit later.
gordon--alpha-_1_03-17-2024_165127:need to spend a little more time. On the dark side. Okay interesting. Any competing thoughts from you, George? You think that That wraps it up.
george_1_03-17-2024_155127 (1):No, I just was enjoying the banter. I was I was up early listening to the Morgan Stanley conference the other week. And they had the Zscaler CEO on and same thing firing comments away about no weakness, that they aren't seeing any soft softness and spend across the security space. I love that these CEOs aren't afraid to throw some punches at each other. Makes covering stocks a little more exciting when you get that kind of banter
gordon--alpha-_1_03-17-2024_165127:I love it. That's great.
george_1_03-17-2024_155127 (1):There, there are a few other Earnings that I wanted to touch upon. Oracle was interesting to me a bit, so Oracle is a stock that historically is known for. Database technology a bit legacy, right? You associate them more with doing well in the two thousands and being one of the darlings there in the first.com boom, as opposed to cutting edge AI company these days. But nonetheless, they reported, a very robust forecast. Their backlog was huge and really focused on their cloud. And so Oracle, when you think of cloud providers, you don't normally think of Oracle. You think of Amazon, you think with AWS, you think of Microsoft, Azure. And you think of Google, but you don't really hear Oracle. Oracle has a cloud offering and one of the things that they've been talking up is how it's better for ai. It's more optimized for ai. And so before na, before this quarter, you hadn't really seen evidence of that happening. And this is a big cap name too, as as Gordon's pulling up the chart here you can see the op, I believe they were up 13% on the day. For a stock that's a 300 billion dollar EV that's a very big move. Outside of NVIDIA, you don't see those kind of moves. And
gordon--alpha-_1_03-17-2024_165127:For a way to see that company, right? It's first we just saw Dell like all these companies are by the way, so i'm not trading like crazy they're so large kept at tech multiples Basically, but yeah When's the last time work i'll move that much in a day like and they're like the perennial like old school I don't want to say losers there's famous like old tech, right? When you say nobody gets Everyone hates the Oracle sales guy more than anyone else. And, everyone talks about how, Larry's the poster child for just like not being from the enterprises and locking people in ERP systems that are incredibly hard to, to remove or switch. And they've got a massive over, you know, also ran, right. You know, they, they, they've not. They've been well below Google. But yeah, they're getting their mojo back, right? It seems like they, they embraced that cloud flair. You may have heard of the no egress thing the hotel, California cloud. That's a big theme for these guys as we'll see. So we'll do this to them. I didn't dig into it. I presume it was their cloud business and traction AI. I'm kind of like, ah, give me a break. Like, Know. I just you obviously can't build it. A models using private ERP data across all your customers. So I just don't see how they win there or we're going to, have the best data set or the best people or anything, why should they do well at AI, but I don't know maybe the vertical solutions or whatever. I don't know if you have an opinion on that
george_1_03-17-2024_155127 (1):no, I think it's, I think it's their cloud offering. They claim it's faster to train on, their cloud versus the other clouds. And
bruce_1_03-17-2024_185127 (1):I think that all the cloud vendors are just seeing a ton of demand based on I can basically run on any of these clouds. And so I think both in training and inference, they're just seeing so much demand. The 1 quote that stood out for me was actually Safra cast their CEO basically talked about real elite level. RPO remaining performance obligations that, that that, yeah, the backlog that you talked about. Basically they're up to$80 billion in RPO up from 65 billion the previous quarter, and they expect to recognize 43% of that over the next 12 months. So eight and a half billion
george_1_03-17-2024_155127 (1):Oh yeah. Yeah. Larry added to that He said 40 contracts booked with more than a billion that haven't even come online yet. Those are huge. It's just, it's amazing. So Oracle is one that I'm going to watch. I haven't known their stock in years, but it's one that, it's not an expensive stock. So it's one that I'm going to put on my radar. Maybe I'll nibble at it a little bit here. One data point doesn't necessarily make a trend, but with that kind of backlog, I think you got the wind at your back here for a while. Maybe one other one that you didn't have on the chart and then I'll let you get to the other type movie movers But it's on here is Adobe and so Adobe was one and I do own the stock as a disclosure I've owned the stock for a while They had been a darling of AI So they have some of the more AI tech that you can touch and you can see so they're known for Among other things, Photoshop they released their AI module for that, which is called Firefly, and you can do a lot of really cool stuff. If you've been putting commercials out there, you can magically change the background of your photos. You can add, whatever you imagine. You can type something in text. You want a dragon, a rainbow dragon with five wings. It can be imagined. It can go into your photos. And
bruce_1_03-17-2024_185127 (1):what about a cover for a podcast with three anonymous posts?
gordon--alpha-_1_03-17-2024_165127:the man I've been looking at doing at their creative cloud, which, you know, kind of stuck wind. I guess there wasn't quite what people hope. I don't know ARR, like just for me as an innovative budding podcaster, wanting to do experiment with videos, like I'm just untrusting of these, Adobe's kind of large cap, they're definitely, a household name and respected by the creative community, but there's a lot of tools out there to do this sort of stuff. And a lot of them are free and I'm just like, ah, I really hesitated to pull the trigger on there. Whatever it was, 30 bucks a month with a creative cloud for my little subscription. Yeah, but yeah, it's hard to argue with Adobe success.
george_1_03-17-2024_155127 (1):Yeah, no
gordon--alpha-_1_03-17-2024_165127:They're solid.
george_1_03-17-2024_155127 (1):It's not cheap. And I think they disappointed the market, with their Ford guide, not being a bit more robust than what we saw. And I think the other thing that happened in the marketplace that, the analysts were picking up on you had open AI released Sora as an example, and there's a lot of other competition. And so that is something that. Adobe noted. And if you're not familiar with open AI Sora, it's from the same makers of chat GPT, you can type in, a scene or a picture that you want an animated movie that you want to create, and it will create that scene for you on text. And so very competitive with. Adobe, it's something that, folks at open AI have said they rushed to production. It's not even where they want it to be. And yet it's very much on par with Adobe. And so you can say maybe some of that competitive advantage that Adobe has had long term is being eroded away because Gen AI is just so easy to work with. And so I think there are going to be other competitors here. There's a lot of startups like Pika Labs, is a cool one. I've watched their videos. They have Elon in space, cows flying by him. You can create whatever your mind can imagine. They can create, and you can make your own little movie. So it's going to empower a lot of folks. And there's a lot of platforms that do it. The one thing I will say for Adobe.
bruce_1_03-17-2024_185127 (1):Do you think that this has still have a real impact on a lot of these kind of, large cap tech companies that are racing into the AI space? Not so much the infrastructure guys like Oracle, but more at the application level where. You effectively have a couple commodity platforms and really it feels like in some ways this is a race to the bottom like you don't need 100 different ways to create an AI video. You need maybe 1 max 2 potentially 3 do you think that all of these platforms have a place and can continue to live in kind of an independent
george_1_03-17-2024_155127 (1):I don't think it's the competitive advantage that you've seen from the first movers where you're wowed, the first time I saw Pika Labs, I was blown away, but, it's quickly being replicated because the technology You know, everybody's tapping into the same sources of technology to deliver this. And so I think there, there's not a huge competitive advantage where I fall back a little bit is I do think if you are an incumbent, you have a few things that are going for you and why I'd stick with Adobe and why I continue to hold the stock is one, you already have the customer base that trusts you to, when you do want to get in and you want to edit, you have the traditional tools. So if you've played with AI, at least today. Sometimes it can be frustrating. It doesn't do, you can describe a scene and it won't do that scene for you. It will do its own version of it. And you can try over and over again. Eventually you have to get your hands dirty. And those editing tools are actually hard to use. That's what Adobe has done really well. So I think they're going to continue to do well in that space. And then at the end of the day, they have the users, they have more data than anyone else. So I think over time they will be able to do more with the data. So I continue to still like Adobe. I like the incumbents, where it's the same business model that they've always had. I don't think they're going to be easy to disrupt. But yeah, you don't need 15 of these platforms. I think a lot of these small guys are going to fall away, but they might eat at the edges. The podcaster who wants to make a single shot of their, cover. Yeah. You don't need a fancy suite to do that necessarily, but you probably weren't going to Adobe in the first place.
gordon--alpha-_1_03-17-2024_165127:Interesting. All right. That's good. That's a good let's put a bow on that. I want to, get naked here with you guys. And this is my first
george_1_03-17-2024_155127 (1):is this where my shirt Won't have any green on then.
gordon--alpha-_1_03-17-2024_165127:are we supposed to flip it? What I was going to do was, what I did was I painted one of my nipples green. George, why don't you guess which one it was?
george_1_03-17-2024_155127 (1):I'm going to go with the third one.
gordon--alpha-_1_03-17-2024_165127:Oh, how did you fucking know, dude? Who told you?
george_1_03-17-2024_155127 (1):The
gordon--alpha-_1_03-17-2024_165127:Are you still texting my wife? I told you not to text my wife, you dirty bird. All right you
bruce_1_03-17-2024_185127 (1):Which one?
gordon--alpha-_1_03-17-2024_165127:going to go, you want to go 1st or 2nd, you want to be a polar bear.
george_1_03-17-2024_155127 (1):You know me. I like the shorts as I described in the first episode. Give me the bear.
gordon--alpha-_1_03-17-2024_165127:Okay, I think it would make some sense to before we go full into the bull case and slides you have, but I want to, I think maybe Bruce is the 1 to talk about this just quick, I'll just do a quick overview and then we'll hand it to you. But I think I need your help describing these guys in a slide or two here, Bruce, about what they really do. I think there's definitely a big security component that I under appreciate Anyway, so these guys, they were founded in 09, that was a good class. A lot of good companies. When I IPO'd in September of 2019, it's interesting that in their cave, like they're one of the few tech companies I've seen that doesn't have any, like really named competitors. Like we have no equal, like we just compete with all these different categories. Like we do everything, like all these idiots that produce like, hundreds of billions of dollars or product categories. Look at this page, like Cisco, Palo Alto, Cloudflare, a little Cloudflare came along in 09 and just created this Swiss Army knife. But anyway, either here or there, there's a lot of companies here. And so I guess I'm just what the hell is this thing? Help. Can you help us tell investors or explain investors kind of layman's terms, like what's special about them, like what they do. And I have a real, I prepared this. I'm going to play this quote. This is, I'm going to get my fugazi. Basically it's just like, when I read this K and see these slides, I'm like Jesus Christ, they're everything, everybody, and so I'm just a little bit cynical. So maybe we'll start there. You want to take a shot at this Bruce, maybe explain to people like what this is is it a CDN? Is it a firewall? Like what is this magic box that, that we're all. So enamored with it's not a box, right? It's software. Sorry,
bruce_1_03-17-2024_185127 (1):Yeah. I think that it started really like more CDN so basically a CDN is a content delivery network and effectively, what it does is it allows for websites of any size to stir, to serve. Their customers or serve their viewers with content much quicker than they could if they were only working with kind of like Amazon servers, for example or if they're only working with Microsoft server. So instead of going back to Virginia every time you want to fetch content. Companies like Akamai, companies like Cloudflare have placed servers very close to everybody across the world. So they're within a couple milliseconds of anybody in the world. So if I'm looking at a page from ESPN and my neighbor is looking at a page from ESPN, instead of going back to Amazon's server farm in Virginia, they'll go to a server farm here in New York City or a server farm in New Jersey or something that allows them to deliver the content a lot faster. And this is a concept that's been used really, actively for several years even decades at this point, it allows for companies to get content to their viewers a lot faster, which, You know, for folks that are running e commerce sites, for example, results in more conversions, it results in bigger basket sizes results in. Kind of less frustration from end users. So that kind of, has proliferated as a concept from every company, from sort of Google to companies that are starting on Shopify and it continues to be, a major, I would say revenue driver of a lot of companies, both on the public and the private side, probably Fastly, Akamai Cloudflare are the, maybe some of the more well known ones but it's become a systematic part, I think of a lot of companies that, deliver connectivity to their enterprise customers.
gordon--alpha-_1_03-17-2024_165127:George gets really frustrated the steps sister born doesn't get served up, but can, thankfully, you know, corn, he is using CloudFlare and knows that he likes that stepsister. It's
bruce_1_03-17-2024_185127 (1):I think, actually, I want to say, I don't know the full details, but I think CloudFlare actually ran into some trouble here, not on the stepsister porn side, but I think it was in delivering some sites like from Russia or providing connectivity to some sort of end user website that was considered not beneficial for the internet or anybody else, but it is actually an issue. Not so much for, for for Gordon's three foot fetish viewers on his only fans channel, but those folks can actually go directly to Virginia and
gordon--alpha-_1_03-17-2024_165127:I pay for dedicated pipe to Gidget the Midgets only thing. Like I don't stay on the public internet for that. Like I can't.
bruce_1_03-17-2024_185127 (1):He actually pays his OnlyFans users instead of the other way around.
gordon--alpha-_1_03-17-2024_165127:that's here's a service. She's a really
bruce_1_03-17-2024_185127 (1):A weird model.
george_1_03-17-2024_155127 (1):wait, don't.
gordon--alpha-_1_03-17-2024_165127:So take the security piece of it, though, like that's like, how did they miss the boat? Everyone's Oh, this is really a security name. We're not just a bandwidth, transportation, dumb pipe. Or it's not dumb, right? It's a layer above them, right? But it's transportation, basically in CDNs.
bruce_1_03-17-2024_185127 (1):right. So I think basically what they were able to do from building this really dense network across the entire world of actual servers and physical locations because they were able to see a ton of all the Internet traffic and because they were able to see that they were able to understand, what traffic is good, what traffic is a bot, and they were able to, Put into place a lot of the kind of security functionality that you see with some of the competitors in the market. So think like a Z scaler or a Cisco or a Palo Alto networks or a crowd strike. And just based on the fact that they were seeing so much Internet traffic, they had a level of fidelity in their solution that other, folks in the security space really, can't even match. And as you think about, I think enterprise budgets, like cybersecurity, at least over the last, 2 to 3 years has certainly been more resilient than other parts of the enterprise. But if you look back over the last 10 years, that's probably true. And as you think about the next 10 years, cybersecurity is really the budget that enterprises want to cut last, right? If something goes down and they end up on the front page of the wall street journal, which has happened to a lot of different companies over the years, that's a real. Liability for the company. And so the fact that crowd flair has so much insight into what's going on across the internet gives them a very unique position to be able to defend these enterprise assets and not even just the enterprise assets. Like we'll talk about it later, but they have almost 200, 000. customers that are paying them today. So they have a footprint that's almost unmatched in terms of number of companies that's, that are using them. And all of this intelligence is basically feeding their platform and allowing them to deliver a security service that other people
gordon--alpha-_1_03-17-2024_165127:Just wondering though, like, why didn't Icomod do that? They just weren't founded in 09 and just, just the classic innovators dilemma these new guys show up and they get a clean sheet of paper and, and the old guys, they're not going to reinvent themselves. They don't have the incentive to do so Cloudflare, another big element here was, they're part of the independent cloud, so to speak, right? Amazon, all the big cloud players, this is a theme. constantly in tech about, how some of the big players are trying to be the company store, right? And CloudFlare has been the poster child. It's but Oracle's also, we just talked about like basically Amazon, Toyota, California, they charge you, like many months of storage, for example, to get your data out. So they, basically you can't take your data out to go use it. It has somebody else's AI algorithm without paying a huge tax. And so there's just like this very anti competitive thing. And Google and in cloud flare and others in the independent cloud, so to speak, like there's like a, equivalent of Amazon or Microsoft or every piece of the stack. These guys are just they're rattling the saber that, Hey, these guys are, they're creating agreements between some of their partners where they don't charge anything. To get the data out to transfer data between them. They're playing the disruptor and it's, or the the good guy too, because really Amazon really is I would venture to say, they're definitely earning very good economic rents. Another way of saying that is there's screwing people but, just like Larry Ellison, by the way, I want to say I'm really rooting for Larry to get even to Richard because he's trying to solve for immortality. And I'm hoping that I can be one of The haves and not the have nots for that technology. So go Larry,
george_1_03-17-2024_155127 (1):does look like he's
gordon--alpha-_1_03-17-2024_165127:cousin Larry. I love him.
george_1_03-17-2024_155127 (1):75 but
gordon--alpha-_1_03-17-2024_165127:I think he's pulled his cheeks over the back of his head.
bruce_1_03-17-2024_185127 (1):50 though. Not like a, this guy just turned 50 fresh off the turnip truck.
gordon--alpha-_1_03-17-2024_165127:Yeah.
george_1_03-17-2024_155127 (1):I'll take it at 75.
gordon--alpha-_1_03-17-2024_165127:was telling, I'm not going to judge me. I'm like he got that stuff done way early on. He's got Joan Rivers kind of technology. I think maybe generation two, Joan Rivers. All right. So anyway, who is his surgeon? Does anybody know his surgeon? I hope somebody puts in the
george_1_03-17-2024_155127 (1):He is a mentor, one of the few mentors to Elon Musk, so I'm waiting for Elon to get that same surgery done. He's getting up there. One of these days Elon's gonna start looking like Larry. That's my bet.
bruce_1_03-17-2024_185127 (1):Elon, I think honestly, like one of the most remarkable things that Elon has done, putting aside SpaceX and Tesla and the boring company and all these other at a multi billion dollar,
gordon--alpha-_1_03-17-2024_165127:the most, one of the most innovative rich people on the planet. Putting that aside.
bruce_1_03-17-2024_185127 (1):we're probably the most dynamic and maybe the best CEO of the last a hundred years putting all that aside. The ability for him to regrow his hair after he went bald has been unparalleled. If you've seen the
george_1_03-17-2024_155127 (1):wait, has he really gone
bruce_1_03-17-2024_185127 (1):Elon 20 years ago, after
gordon--alpha-_1_03-17-2024_165127:like,
bruce_1_03-17-2024_185127 (1):You gotta show the We gotta show the picture of him after he sold X originally, to today's picture. It is incredible.
gordon--alpha-_1_03-17-2024_165127:It. They tortured me with it.
george_1_03-17-2024_155127 (1):called Propecia.
gordon--alpha-_1_03-17-2024_165127:tortured me. This is
bruce_1_03-17-2024_185127 (1):His No, his follicle density is up more than Tesla's
george_1_03-17-2024_155127 (1):I will
bruce_1_03-17-2024_185127 (1):It's just ridiculous.
george_1_03-17-2024_155127 (1):Propecia works, it just affects other things that you may not want it to impact aka your sex drive.
bruce_1_03-17-2024_185127 (1):look at this!
gordon--alpha-_1_03-17-2024_165127:I'll tell you what, it does not work in certain regions, as I've found.
george_1_03-17-2024_155127 (1):you are right.
gordon--alpha-_1_03-17-2024_165127:yeah, maybe he's sunlight. Maybe he's
george_1_03-17-2024_155127 (1):This is news to me. I have never seen this in 2000.
gordon--alpha-_1_03-17-2024_165127:Yeah, he's
george_1_03-17-2024_155127 (1):He is a
bruce_1_03-17-2024_185127 (1):the list. That's what is the clothes track game.
gordon--alpha-_1_03-17-2024_165127:He's paying a
george_1_03-17-2024_155127 (1):It's not really the same man. Yeah.
bruce_1_03-17-2024_185127 (1):incredible. This is all time.
gordon--alpha-_1_03-17-2024_165127:Look at that, dude. Only he could get away with that shit. And still who are all these hot chicks that he's made? Who was the chick that he dated?
bruce_1_03-17-2024_185127 (1):Amber Heard. Amber Heard. Amber
gordon--alpha-_1_03-17-2024_165127:I know like we're too busy generating alpha to track that shit. Yeah. He's got quite the little, I don't know, man. I just feel like.
bruce_1_03-17-2024_185127 (1):He's Iron Man.
gordon--alpha-_1_03-17-2024_165127:There's not enough said about his facial hair. Like he's really can't carry it. It's just nobody's being honest with him. I'm just being honest.
bruce_1_03-17-2024_185127 (1):Do you, I have a question. Do you guys think when Elon and Jeff Bezos are at a party late at night and it's getting to that time, Jeff pulls them inside and goes, you do it, man?
gordon--alpha-_1_03-17-2024_165127:Oh, the hair.
george_1_03-17-2024_155127 (1):Those biceps and ask him how he
gordon--alpha-_1_03-17-2024_165127:dude, Jeff is fucking swole, dude. I, I don't know that he's really worried. He's got the Bruce, he's embracing the Bruce Willis kind of the
bruce_1_03-17-2024_185127 (1):I think honestly though, look, I will defer to George here, but I think growing muscle is easier than growing hair.
george_1_03-17-2024_155127 (1):just gotta have both.
gordon--alpha-_1_03-17-2024_165127:know what? I can't, it's hard to argue with the logic and I'm not sure anybody's ever put it that way. All right, the gauntlet's been thrown down. The invitation's still open for Elon and for Jeff. Anytime they want to come on our show.
george_1_03-17-2024_155127 (1):Tell us their
gordon--alpha-_1_03-17-2024_165127:Yeah, that's right. They could be anonymous. Click the innocent. Actually, you never know. Maybe George is Elon. I don't know.
george_1_03-17-2024_155127 (1):I'm part robot, don't
gordon--alpha-_1_03-17-2024_165127:Yeah, that's right. Yeah, so moving on, let's go back, by the way, we need to talk about some people's commitment to this scheduling. Bruce. Bruce. Bruce. Maybe you would explain to the viewers what happened why they didn't get their edition of Cloudflare
george_1_03-17-2024_155127 (1):The fans have been screaming. I've been hearing it. All five of them.
gordon--alpha-_1_03-17-2024_165127:I don't know, it's really, they're like worse than Swifties so yeah,
bruce_1_03-17-2024_185127 (1):think the problem is like behind the scenes here, there's nine kids in the mix. I
gordon--alpha-_1_03-17-2024_165127:Disenergies of scale. We've got seven different geographies.
george_1_03-17-2024_155127 (1):you have nine kids?
gordon--alpha-_1_03-17-2024_165127:No, they're not my kids. They're just
george_1_03-17-2024_155127 (1):Yeah, different women,
bruce_1_03-17-2024_185127 (1):Nine kids and seven time zones. Like it's just outrageous.
gordon--alpha-_1_03-17-2024_165127:There's gonna be another chart here, but let's just look at a year for fun. Alright it's
bruce_1_03-17-2024_185127 (1):There we go.
gordon--alpha-_1_03-17-2024_165127:Gotta, you gotta zoom out and see the whole picture. Let's go back to 2021 when, when things were shit. Nutty there, right? So this is a crazy 220 bucks.
bruce_1_03-17-2024_185127 (1):got plenty of room to run
gordon--alpha-_1_03-17-2024_165127:Yeah, that's right. That's
bruce_1_03-17-2024_185127 (1):is like a, this is like a, an early version of the Bitcoin chart.
gordon--alpha-_1_03-17-2024_165127:Yeah, this is totally irrational. Yeah, this makes sense. Everything looks like Bitcoin to you. Basically, this is a company that's doing 1. 3 billion in 23. Hey, 10 percent off margin, like it's not bad for a company that's still growing 33%.
george_1_03-17-2024_155127 (1):Let's just clarify non gap op margin there. So we're ignoring all those, real
gordon--alpha-_1_03-17-2024_165127:The stock is basically free.
bruce_1_03-17-2024_185127 (1):We'll talk about this more, but operating margin is not a real metric here of value but
gordon--alpha-_1_03-17-2024_165127:Not for us West Coast investors. You don't care about profitability.
bruce_1_03-17-2024_185127 (1):We should, this should have, we should have cut, this should be cut off after sales and growth.
george_1_03-17-2024_155127 (1):Yeah, who cares about
gordon--alpha-_1_03-17-2024_165127:Profitability.
george_1_03-17-2024_155127 (1):No one needs money on the bottom line. Let's give it all to the employees. God.
gordon--alpha-_1_03-17-2024_165127:Just the tip of it. Just the tip. So anyway, here we go. You pay us to say that. All right. So again, like you're going to see, you're probably gonna repeat some of this. It's really quick. They've grown like 46 percent in the last five years. They're starting to slow a little bit. Law of large numbers. I hate it when people say that, but
bruce_1_03-17-2024_185127 (1):That's the lead growth.
gordon--alpha-_1_03-17-2024_165127:Trees don't grow to the sky. NRR, I'm going to say this, we're a strong dollar based net retention. This is an important thing, you can address this, they basically do nothing, and they don't lose any customers. On average, they grow up by 15%, because of data growth, basically, or whatever, or because they add features,
bruce_1_03-17-2024_185127 (1):customers love them so much that they want to spend 15 percent more every year.
gordon--alpha-_1_03-17-2024_165127:pretty much, like my wife, she wants to spend 15 percent more every year,
george_1_03-17-2024_155127 (1):cable company seems to More every year. I don't love them.
gordon--alpha-_1_03-17-2024_165127:Regardless of my wife is going to be an awesome foil. I can't wait to see, listen to this someday, baby.
george_1_03-17-2024_155127 (1):I think you're safe there. I don't
gordon--alpha-_1_03-17-2024_165127:So anyway, I don't know. She hears enough of my mouth. All right. So here's a long term model. I know you don't give a shit about any of this stuff. But they were doing their long term model is 25 percent operating margins at scale. It's this model looks like a typical. Sophomore model, like operating, this is, I've probably seen that number before, but the point is they're going to be way more profitable. They're going to grow earnings faster than sales. Eventually they have to,
george_1_03-17-2024_155127 (1):what every software company says.
gordon--alpha-_1_03-17-2024_165127:Yeah, here you go. Gut check, there's this goal out there, 5 billion in sales in the next five years. I just did the really rough, or you should say back when they said it. So in 2027, they have a sales goal of 5 billion, slap a 20 percent operating margin on it. I guess I could put 25 on there. It's a billion, you tax it. They do pay taxes, I think. Or maybe within the run of NOLs, but I'd like to tax things, right? I'm a purist. Okay. I don't like to pay for untaxed earnings because that's, I'm not paying for tax strategy here. So if it gets bought right there, those NOLs are worthless. So that's a topic for another show. So basically 650 million in income, if you do the rough math on their goal in 27, the streets below that, but in the zip code at 537 but Yeah, it's hey, 52 times their net income of their market cap of 34 billion. It's doesn't look cheap on this number in the future So just, I'm going to put that in your pipe
bruce_1_03-17-2024_185127 (1):Or does they? I think not to spoil the ending here, but, I think if you're betting that the company is going to get to 5 billion in ARR or revenue or some proxy for the top line, 35 billion dollars or seven times isn't a ton to pay.
gordon--alpha-_1_03-17-2024_165127:and it's very West Coast frothy thing to say, but okay. but yeah, these multiples, yes. That doesn't seem insane for this company. Certainly given growing 30%, I don't know, they'll be going 30 percent then. But even then, like. Large cap premium people love them. So like I just did a quick comp table here, former sell setter, can't, take the guy off the sell side, can't get sell side of the guy. Basically, basically on average, Analysts that have by ratings, but like it's a weird concrete before. I don't love this kind of groups. They don't yell at me. I can put lots of other folks in there.
bruce_1_03-17-2024_185127 (1):I have a different comp group that we'll show
gordon--alpha-_1_03-17-2024_165127:Oh, perfect. Excellent. Save me.
bruce_1_03-17-2024_185127 (1):A more, you would, some people would say a more appropriate comp group.
gordon--alpha-_1_03-17-2024_165127:All right, I'm ready to
bruce_1_03-17-2024_185127 (1):true.
gordon--alpha-_1_03-17-2024_165127:I'm ready for the bull
bruce_1_03-17-2024_185127 (1):probably the last good word you'll say.
gordon--alpha-_1_03-17-2024_165127:I'm ready for balls to go balls in on, I'm sorry, on Cloudfair. Shirt back on real quick. Wash off my nipples. I can see that you were definitely a fucking banker though. Jesus Christ. This is sexy. It's got a lot of sizzle. Let's see. It's got,
bruce_1_03-17-2024_185127 (1):Try to do it over the heat. Yeah I'll just start it off, cause I know I know George has gotta go to a birthday party for his mistress or something. Anyway
george_1_03-17-2024_155127 (1):25 once.
bruce_1_03-17-2024_185127 (1):probably, We covered a lot of this, but back in 2018 Cloudflare was, a company that had a great CDN that was starting to build some of the, their other products around security principally, but also, some of the platform products like serverless compute and their workers product as well as, some products around availability and reliability. So in 2018, They were a shadow of what the company is today. In a lot of ways, if you go to the next slide, this is the company that CloudFlare has turned into. They are really a, an enterprise grade company for everything from availability to security, to application services. They have a global network. They can reach any customer. Within, a couple milliseconds, they have a platform that allows folks to do everything from build serverless products to, protect them against bots to screen users from different countries that shouldn't be or should be accessing, their website or their technology. It allows for companies to convert their users much quicker. It gives the availability at an enterprise level, and they're able to see more traffic than basically any service on earth, which gives them a unique advantage, I think, in the market. So next
george_1_03-17-2024_155127 (1):they're Jack of all trades and master of none is what you're telling me.
gordon--alpha-_1_03-17-2024_165127:By the way, they
bruce_1_03-17-2024_185127 (1):so they're they're a jack of 3 trades and a master of 2. 5, I would say they've built a product that is a world class CDN. They built a product that's a world class kind of security engine. And I think they have, a host of other products around the edge that are, probably not the best of class around the edge, which is a double entendre, both in terms of like edge computing, as well as in terms of, edge parts of their
george_1_03-17-2024_155127 (1):Interesting.
bruce_1_03-17-2024_185127 (1):And so what does that mean though, for the company in terms of, their ability to expand? They've basically gone from one part of the market and one part of the TAM equation around. Cloudflare application services to really doing everything from zero trust to network services to developer services. So their time is really expanded from, 30 billion to call it 150 billion. It's up 5 X in 5 years. So there's this huge market opportunity for
george_1_03-17-2024_155127 (1):How much of this is, would you say that their expertise is on the edge? How much of this is on the edge? That they're expanding into? Is Zero trust on the edge, for example.
bruce_1_03-17-2024_185127 (1):I don't think so. Zero trust is like a core principle of modern kind I think that they can deliver a world class solution at the edge. I think that you can deliver a zero trust solution at the edge. I think if you have a unique data set that allows you to see other things that other people can't, you can deliver a security solution that works well at the edge, but I think the broader question for the average viewer isn't so much about. What are each of their products and how are they differentiated from their competitors? It's more of a macro question. Is this a big enough market for them to tackle? Is there enough revenue here for them to scale a business from 30 billion to a hundred billion dollars? And so if you go to the next slide, asked the question, isn't Tam bullshit? Isn't the whole thing around, this is how big the market is really just an exercise in trying to figure out who can come up with the biggest number. And I think, for a lot of companies, it can be right. And we, you see this a lot with younger companies, right? If they can attack or if they can deliver to 1 percent of a hundred billion dollar market. That's a billion dollars in revenue. And oftentimes that doesn't materialize in any kind of realistic way, or it takes longer to materialize. And so I think the, the crux of the issue for most people, when they look at TAM charts or TAM graphs is really, isn't this, just a bunch of bullshit doesn't really translate into real revenue. Is this how I should think about valuing your company? Which is, I think maybe, George, where you're going with the question generally. And so if you slip to the next slide. It isn't for CloudFlare, if you look at where their business has gone right over the last five years, really, since they, they went public to today, they're large customers. So customers that are paying over a hundred thousand dollars is up seven X. We said the market was up five X. And so they're effectively beating, a market metric for where they've estimated their TAM to be by a couple turns. And that's, that's pretty remarkable. I would say for a business that started as a, I would say smaller or medium size kind of enterprise business to scale now into a real enterprise sized business, where you do have customers that, are willing to pay six figures, you do have customers that are willing to pay in some cases, seven figures, and you're able to scale that customer account really dramatically over, over a kind of a short time period. And that's also, as. As Gordon had mentioned, led to, real revenue growth, right? Their revenue is up seven X. So the TAM is expanded, but the revenue has expanded faster. So maybe TAM isn't a perfect science for thinking about, how a company should expand or grow. But in Cloudflare's case, they've been able to beat that
george_1_03-17-2024_155127 (1):okay. So the revenue is up. The original CDN estimate I think you had on the previous screen was like, what, 32 billion? Oh, look at that. 32 billion in 2018. Sorry, it's grown since then. They don't even put a number on it. Obviously, this could still just be CDN and all the other stuff is fluff that they're talking up their investors to. Do they actually tell you how much they're doing in zero trust or network services
bruce_1_03-17-2024_185127 (1):I didn't see the breakdown of. But, I think like a 32 billion market in and of itself is probably good enough to, if you have a world class solution, deliver some percentage against it over time, right? As a 35 billion company, if you're a third, 350 million company, I think it's a little bit different of an equation, but if you're servicing 200, 000 businesses in the world, I think your scale allows you to. Break into other markets and I think that, the fundamental points still exist, right? Like they are considered today a cybersecurity company in a lot of ways. That's where they wanna generate a lot of their revenue from. That's where they have clear differentiation. I would say the CDN market in some ways is a commoditized market, but you have a number of players that make real money in the market, right? Akamai has been along for around for a long time. Fastly went IPO and has gone through some ups and downs. And Cloudflare built their initial solution and really went public on the back of CDN. So I think CDN will continue to be a productive market for them. I don't think it really has a, limit in terms of how far they can penetrate that market, but I think that their core kind of focus, so we think about the foreseeable future and what you would be investing into. Is around cybersecurity.
george_1_03-17-2024_155127 (1):All right. I'm just calling out, they don't break out those other segments. And in my experience, if a company doesn't tell you what they're generating revenue from those other areas, they really aren't. So my guess is they're still clearly in that 32. It's a fair point to say 32 is plenty to grow into when you're sitting at, below 2 billion in revenues, you still have a lot of room to go.
bruce_1_03-17-2024_185127 (1):I think that's true. And also the fact that it's gone, it's grown seven X in five years means that they've been able
george_1_03-17-2024_155127 (1):We're doing something
bruce_1_03-17-2024_185127 (1):put aside the market
george_1_03-17-2024_155127 (1):with you there.
bruce_1_03-17-2024_185127 (1):and they. All right. So moving on, but maybe that's what everybody thought. Maybe when cloudflare came to the market, that was what everybody was thinking. And think the question for a lot of people, especially when they invest in stocks is not really so much, how the company is going to do at an intrinsic level. It's really. Is this company going to live up to the expectations of what the street thinks? And are they going to beat those expectations? Are they going to miss those expectations? Are they going to hit those expectations? And so the question for a lot of companies, especially as you look back over the last kind of couple of years, five years, 10 years is how have they lived up to their expectations? Maybe everybody thought the cloud fair was going to be a big business, in which case, maybe they wouldn't have raced ahead from a multiple standpoint in the same way that they have over the last couple of years. It turns out that they were wrong so effectively, CloudFlare came out and their last actual full year number was for 2018, and they were, they did$193 million in revenue. And the forecast for the next kind of, four years was to go from roughly 193 million in revenue in 2018 to 618 million in 2022. That was the long-term estimate. That the street had placed on the company. And if we fast forward to today, because we have the benefit of hindsight. We can see pretty clearly that CloudFlare has outperformed those estimates. So the original kind of analysis was that, CloudFlare would grow around, I think it was 35%. Over the next kind of four years, 36 percent over the next four years. But when it ended up happening, if we skip ahead to the next slide, is that CloudFlare actually grew, whoops, about 50 percent in that same time period. They put out four years of estimates. So I put out four years of, results and the results paired out in 2022. Wall Street thought that Crowdfire would do$618 million of revenue. The reality was they did almost a billion dollars of revenue. They beat Wall Street's estimate by almost$400 million. That isn't just a little beat. That is a world class ass whooping. Like these numbers were nowhere near where wall street thought they were going to go. So if we go to the next slide. Cloudflare is an elite business, really, in a lot of ways, as we talked about that just gets better with age. They continue to beat estimates. They continue to build on their kind of core platform. They deliver a solution that's really exceeded every estimate in terms of both product as well as in terms of their performance from an
george_1_03-17-2024_155127 (1):Like my hair.
bruce_1_03-17-2024_185127 (1):we slipped in the next
george_1_03-17-2024_155127 (1):getting fuller and richer.
bruce_1_03-17-2024_185127 (1):grayer and But no, but it's more distinguished, I think if you flip to the next one, click, I think this is a better go back. This is a better version of what cloudflare is. And this is a picture for a listening only audience of LeBron James.
george_1_03-17-2024_155127 (1):Wait, are the
bruce_1_03-17-2024_185127 (1):This is an elite business. It's not so much of a team sport as it is individual here.
george_1_03-17-2024_155127 (1):Because I think when he was in his prime, they were winning championships. Miami and and
bruce_1_03-17-2024_185127 (1):This is a different tangent, but I think he had a couple of players on his team that enabled him to win those championships. In most cases, not in all of them, not in all of them. I don't know. But in, in Miami, for sure, I would say not as much in Cleveland. Anyway, let's keep going.
george_1_03-17-2024_155127 (1):You're just giving me some some layups here. I gotta, I gotta take my shot.
bruce_1_03-17-2024_185127 (1):This is this is the summary and this is from, their their investment, Their investor deck, but basically, Cloudflare is protecting. 200, 000 paying customers today. And that doesn't talk about the number of unpaying customers, which is probably several factors larger than that. They block 182 billion threats a day. This is something that's unique to them because they have the information that enables them to do that. 60 percent of their revenue. A lot of people, I think discount companies that are selling more to the SMB. So companies that are selling more to customers that are, I would say, have a lower ASP or average selling price. In Cloudflare's case, 60 percent of their revenue is coming from large customers. The customers that are effectively doing, call it more than 100, 000 in revenue for the company every year. And half of their revenue is coming from outside the United States. So it's a pretty diversified company. If we go to the next slide.
george_1_03-17-2024_155127 (1):threats a day. That's, how many people are on this planet?
bruce_1_03-17-2024_185127 (1):It's not only the people though, you have to think about how many bots are on the planet, like how many people are sending threats to multiple different computers, how many people are sending threats through machines, and how many machines are talking to other
george_1_03-17-2024_155127 (1):field's a little
bruce_1_03-17-2024_185127 (1):Cloudflare has this really robust platform, it can protect people, it can protect machines, it can protect any internet property. You gotta think outside the box here. You can't just limit yourself to the number of people. The TAM is bigger than the number of people. You gotta count everybody.
george_1_03-17-2024_155127 (1):an in the box kind of guy here.
bruce_1_03-17-2024_185127 (1):And so the older the company gets the more people like it. And this is true of the United States as well. This is a picture for our listeners of of Joe Biden, Joey B and and Donnie T Donald Trump. So America, loves old people. We love people that get older. And at some point this year, we're going to vote one of them back into the office. That, that is a good analog, I think for how Cloudflare
george_1_03-17-2024_155127 (1):Is the Boomer platform is what you're telling me.
bruce_1_03-17-2024_185127 (1):Cloudflare is a path platform for the people.
gordon--alpha-_1_03-17-2024_165127:I think I was going to ask, do you think that maybe Joe's sniffed old Jensen's jacket at the White House, like maybe one of those sort of like tech summits? Anyway, I'm just, I just really want to
bruce_1_03-17-2024_185127 (1):would sniff the jacket if any of his magic would rub off on me. Back to, the company itself, the older the company gets, the more people are using, the more people like it, in 2020. So this is a 3 year time frame. The company has gone from having 71 large customers. So customers over 500, up 5X large customers over a million dollars. They've gone up 4X from 32 in 2020 to 118. This is a company that's getting better with age. Just like the two candidates running for president, it is getting better and better with age, it's a fine line.
gordon--alpha-_1_03-17-2024_165127:was going to say, I'm going to say, you're saying this is the Helen Mirren, right? Okay.
bruce_1_03-17-2024_185127 (1):I don't get the reference, but it sounds like it could be directionally correct.
gordon--alpha-_1_03-17-2024_165127:on, man. Demi Moore. Like I have to go to the list of
george_1_03-17-2024_155127 (1):Gordon, your old man references are going over our heads, so you gotta stick with
gordon--alpha-_1_03-17-2024_165127:Taylor Swift. How about
george_1_03-17-2024_155127 (1):Biden crew.
gordon--alpha-_1_03-17-2024_165127:Biden, Trump. All
bruce_1_03-17-2024_185127 (1):So the thing that I think George wants to talk about more than anything, of course, is valuation. How should we think about valuation? And, like I always say to people, it's not rocket surgery here. This is something that's pretty easy. And it goes back to the earlier part of the conversation. You can basically, for high growth, Technology companies, especially the companies that are considered elite that are growing really quickly on the top line. You can basically get rid of everything underneath revenue and growth. That's effectively what the market is using to value them. They do in CloudFlare's case, they do have EPS, they do have operating margin. They are able to produce earnings, but the market is clearly valuing them on revenue and on growth.
george_1_03-17-2024_155127 (1):Like what you did here, though, on the rocket surgery. It's not,
gordon--alpha-_1_03-17-2024_165127:by the way,
george_1_03-17-2024_155127 (1):science, and it's not brain surgery, so I'm I got that one.
gordon--alpha-_1_03-17-2024_165127:And the rocket surgery is only, they're only good at like improving the girth.
bruce_1_03-17-2024_185127 (1):nothing gets by George.
gordon--alpha-_1_03-17-2024_165127:the, like the length of the rocket cannot be improved with surgery. I'm just saying anyway can probably,
bruce_1_03-17-2024_185127 (1):going back to comp, so I, I. So
gordon--alpha-_1_03-17-2024_165127:It's
bruce_1_03-17-2024_185127 (1):I, I think Gordon showed a comp set before that was highly inappropriate, more inappropriate than his website is saved on only fan. And these are actually the comps that Cloudflare is valued against. And the companies for folks that can't see it are CrowdStrike, Zscaler. Sentinel one and Palo Alto networks. And, just as I just mentioned, when you think about these companies, really, the metric that is used to value the companies is easy to revenue in this case. Folks have started to use Evie to revenue over growth. So you can not only take Evie to revenue as a multiple in the absolute, but also measure that against the growth of the company. Similar to last week, when we talked about peg or, the price to earnings over the growth, this is a, this is an analog on Evie to revenue cloudFlare does trade a little bit above a lot of their competitors. Partly due to the fact that, they're growing faster than some of their competitors. They're an elite company but it is a company that's trading in roughly the same neighborhood as most of their direct comps. And if you look at Palo Alto networks, for example, a company that went public, I think in, 2012, right? So a 10 year old company that's at scale. Palo Alto Networks is effectively trading at 0. 8x when you look at their enterprise value to revenue over growth. And that's a similar multiple to what Cloudflare is trading at. And so I think, valuation isn't ever really an exact science. It's an art and it depends on a lot of different factors. But, generally I would say that Cloudflare is in the neighborhood of, where their comps are trading and in, in some ways they're probably getting a premium because they're, a very compelling platform that a lot of investors want to own. So I think that's one part of the equation. We take, all of the kind of enterprise software companies as a whole you'll see that these companies effectively trade on an EV to NTM to growth multiple of about 0. 45 times, so 0. 5 times, right? And if you flip one click ahead I've shown that basically the median of all of these NTM companies. So there's call it like 75 different companies that are in this index that we're showing. Those companies are effectively growing at 13 percent on an aggregated basis, right? The median growth of all those companies is effectively 13%. And those companies are trading at 0. 45. Cloudflare is growing at roughly twice the rate of all of those companies and that is the reason that it generates a premium to where the rest of kind of the software universe is trading. Cloudflare is an elite company. They have elite growth. They have a business that continues to scale. They've beaten every estimate. They've built their platform, not only on availability, but now on security. They're addressing a huge TAM and they, they deserve a premium for that. And that's why the market's willing to pay a premium.
george_1_03-17-2024_155127 (1):Let's go back to the the last chart. If you if you can, Jamie, for one second here, I will say this company. Is an excellent company, right? I don't think anybody would deny that by the growth. I think historically, they have up through at least 2022, if we like living in the past, they have creamed expectations. 2023 was a little bit of a rougher year for Cloudflare but but we can, we can talk about that. But if you go back to no, not LeBron James and his falling out hair. He needs a little of that Elon juice.
bruce_1_03-17-2024_185127 (1):No argument there.
george_1_03-17-2024_155127 (1):Keep going. Take me back to that comp chart. There we go. All right. So I do agree. The things that you should pay more for are growth, right? And if you look at this chart, it is one of the most expensive. So I think a lot of what Bruce was arguing was it's better than Palo Alto, it's valued at the same value. I wouldn't buy Palo Alto either here. In fact, I sold Palo Alto personally. So I will tell you it was overvalued, but if you look at this chart, 24 calendar year growth. Let's see, where does Cloudflare Bruce? Is it higher than CrowdStrike? At 30. 1? Oh no, it's below that. 27, sorry. Is it higher than Zscaler? Oh no. Zscaler has higher growth. Oh, Sentinel 1? Oh, 32%? No. It's below all of those.
bruce_1_03-17-2024_185127 (1):I think a couple things to note there. We're talking about one or two percentage points
george_1_03-17-2024_155127 (1):5 percent is 20 percent for Sentinel 1.
bruce_1_03-17-2024_185127 (1):Not only that, but let's remember from the earlier part of the conversation, Cloudflare has always beat their estimates. And usually they smack those estimates out of
george_1_03-17-2024_155127 (1):CrowdStrike doesn't beat their estimates? I'm pretty sure they do.
bruce_1_03-17-2024_185127 (1):these, these are cloudflare. These are wall street estimates with which have historically been wrong across the board since inception, since the company floated their
george_1_03-17-2024_155127 (1):thing, okay, so fine, but anyways, I will say they are the lowest on that list. And then what else should you care about? I know in your sales metrics, it doesn't care about
bruce_1_03-17-2024_185127 (1):Power output was like.
george_1_03-17-2024_155127 (1):look, you did include in here free cash flow margins, EBITDA margins. Where do they fall versus those other companies? Wait, they fall below as well. So they're less profitable. They're growing slower. And yet, they're premium priced. So you just set it up for me perfectly here. I would not own
bruce_1_03-17-2024_185127 (1):There's two things, there's two things
george_1_03-17-2024_155127 (1):I could buy these other superior cloud companies in the same space for less. They're too darn expensive. It's an excellent stock that's too darn expensive.
bruce_1_03-17-2024_185127 (1):I think there's, I think there's three things to note here. One, none of these companies are being valued on EBITDA or
george_1_03-17-2024_155127 (1):Yeah, but I
bruce_1_03-17-2024_185127 (1):I don't
george_1_03-17-2024_155127 (1):take a higher EBITDA if you have it today and you're growing faster and you can deliver a higher EBITDA. That's better. That means you're more efficient at your growth.
bruce_1_03-17-2024_185127 (1):but the point is none of the, all of these companies are trading on revenue, right? That's, is that a fair, is that a
george_1_03-17-2024_155127 (1):If we were in 2021, sure. Today the market cares. You keep going back in time for me here.
bruce_1_03-17-2024_185127 (1):All right. Agree to disagree, but I think the fact of the matter is all of these companies effectively trade on, a revenue multiple, or in this case, revenue to growth, which I think is maybe a more fair way of looking at the market. And we're talking about, 10 percent difference here, max, in the market, it's not like they're trading at 25 turns higher, 15 turns higher. They're trading at one turn higher, right? Like it could have been the weather that day in Northern California. I don't know. So it's one of those things I think where it's not an art, it's not a science. It's an art. They're within the range of, they're within a margin of error. That's pretty
george_1_03-17-2024_155127 (1):One turn higher. It depends what metric you're looking at. When you get to Evie by revenue, by growth, right? There's not as much of a differentiation as when you look at other metrics, right? Because there's so much division that goes in there. We won't get into the math, but I think you would say this is a premium stock that you have to believe in a premium growth story for, and that's really, I think.
bruce_1_03-17-2024_185127 (1):You do and I think look the growth story is more around can this company get to five billion dollars in ARR and if it can and you're a long term holder, you're a true value investor Then you put money to work here and then you stop thinking about it
george_1_03-17-2024_155127 (1):alright, so this is for West Coast investors. Alright, I want to make a couple additional points. So if it's a premium company, then, what I want for a premium company is I want a company that's accelerating. I want to see the metrics improving. And this slide that I've pulled up here for our audience listening only is from their own investor deck. So it shows paying customers starting back in Q1 2022, all the way to Q4 2023. So the growth of paying customers is actually coming down. So if you look in Q1 22 was 24%, it was 20 in the next quarter, then it goes to 18, then it goes to 16, then it goes to 13. There is a slowing trend here of customer growth.
bruce_1_03-17-2024_185127 (1):Back up to 15 and then it goes back up to 17 And then it goes back to 17 and 9. You forgot the last three numbers.
george_1_03-17-2024_155127 (1):2022 that you were showing me.
gordon--alpha-_1_03-17-2024_165127:you
bruce_1_03-17-2024_185127 (1):Not to mention, that's on a much bigger base. It went up on a bigger base in the last
george_1_03-17-2024_155127 (1):they're, they are not a company that is that massive scale. We're talking about a company that's below 2 billion in revenues. If you're going to be a massive company. You need to be doing this still at this stage, right? The companies, if you told me this was Microsoft, sure. Yeah, you're not going to have this kind of customer growth. This is not Microsoft. Okay. This is a much, much smaller company. Now, the other thing that concerns me. Is on top of that is dollar base net retention. So you described it as strong, which is great. It's in, you know, 115%. That is a decent number. I won't argue with that. However, the trend is what concerns me. So you go back to that same blowout 2022, they were at 127%, meaning. One customer the next year that was with them before would spend 27 percent more than they did before. And if you look throughout 2022, that was in the hundred and twenties consistently. What happened in 2023? It dipped. It went 117, 115, 116. It was down anywhere from 11 to 7 percent over the same quarter. So their customers are slowing their spend. So not only are you adding less customers, but your existing customers are adding less spend. So for me, the big takeaway is, if I'm going to pay the top dollar, the premium for a company, These metrics better be accelerating and they're not. So for me, this is not the most attractive company. I'm going to go with the Zscaler. I'm going to go with someone else on that list, rather than what you showed.
bruce_1_03-17-2024_185127 (1):There's two things to say here. One, you almost never see companies accelerate their growth and inflect as they get bigger. That just doesn't happen because the base gets much bigger. It's a question of how quickly they're decelerating their growth. In this case, You actually have the opposite. Cloudflare inflected in the last three quarters on a bigger base. That's something that you almost never see in the enterprise. You almost always see this as a one way track, and it's just a matter of how slow you can do it. You can still grow really quickly, because the base goes from 500 million to a billion to 1. 5 billion. The other thing to note is, There's this on net dollar retention is that net dollar retention has been down across the board for every single software company in the entire universe. 115 percent net dollar retention is world class effectively at this point, because budgets have been constrained across the board for every company.
george_1_03-17-2024_155127 (1):Security companies have seen better net dollar retention than other companies. So it is hung in for security companies. They are actually the standout and that it's gone down more.
bruce_1_03-17-2024_185127 (1):If you look at all of the software companies, their net dollar retention as a group is about 110%. This is 500 basis points higher. I'm just saying,
george_1_03-17-2024_155127 (1):I'm just saying as well,
gordon--alpha-_1_03-17-2024_165127:guys are cutting it many
george_1_03-17-2024_155127 (1):if you want me to pay the premium.
gordon--alpha-_1_03-17-2024_165127:I'm gonna, I'm gonna call that a
bruce_1_03-17-2024_185127 (1):I you,
gordon--alpha-_1_03-17-2024_165127:Because you I'm going to be with, I'm going to be with Bruce to some degree that everybody's talking about cloud optimization and cutting budgets and data growth is slower and NR has been going down for kind of everybody in the software space, they are a security company though. So I'm on George's side too, though, because I feel like, if they're going to try to be a security company and it's like they're Ballywick, then it's fair to hold their feet to the fire. The one thing I would push back to you on George though, is like on valuation is I look at this list of, Names. I don't think any of the security guys has as dominated a franchise as CloudFlare seems to have, like they're gaining share at a rate that nobody else is, and none of those guys are it's a very fragmented security space, CDN. It feels like they can just continue to maybe increase share. Cloudflare really is a premium, market leading, unique, it's the it's the gold chip,
george_1_03-17-2024_155127 (1):the gold standard, but I wouldn't say, I wouldn't say they are necessarily delivering on that today, and so I think if you believe that they can continue to re accelerate here, it's not such a large company that I think the law of large numbers are really kicking in, and I think that was the argument that Bruce was making. At a billion and a half, you shouldn't be. This, I included
gordon--alpha-_1_03-17-2024_165127:Not the fucking Magic Quadrant. God damn. I hate these things.
bruce_1_03-17-2024_185127 (1):you lost all credibility.
gordon--alpha-_1_03-17-2024_165127:Jesus
george_1_03-17-2024_155127 (1):I know we got to
bruce_1_03-17-2024_185127 (1):You
george_1_03-17-2024_155127 (1):it up.
gordon--alpha-_1_03-17-2024_165127:the stuff you stick in the
bruce_1_03-17-2024_185127 (1):the.
george_1_03-17-2024_155127 (1):skip over this. I will skip over this other than, CloudFlare in the bottom left there. This kind of talks about their ability to expand their product portfolio. I think they are expanding and expanding their product portfolio.
bruce_1_03-17-2024_185127 (1):This is one solution. This slide is showing secure service edge. So this is one product, one part of the solution where they didn't pay Gartner as much as Zscaler or Netscope and Palo
george_1_03-17-2024_155127 (1):you saying that
gordon--alpha-_1_03-17-2024_165127:All right, Garter's
george_1_03-17-2024_155127 (1):bought? I don't believe it.
gordon--alpha-_1_03-17-2024_165127:going. to go through this fucking thing. You're killing our deal. I got IDC and
george_1_03-17-2024_155127 (1):All right. in the interest of time, I will slip, I will go to my my valuation chart here. And you will see in the last column, I also have E. V. To sales, to growth. I also believe in that. And I think this was taken at a slightly different, this is a week old. So apologies for not updating. So I think my numbers are slightly different than Bruce, your numbers, but I include a broader universe here. So I have some other high growth names as well on this list. So for example a snowflake which is a, best in class company, huge TAM they are cheaper than a CloudFlare on this metric.
bruce_1_03-17-2024_185127 (1):Grunflaer, Eero here, growth is 23 percent versus Cloudflare 28.
george_1_03-17-2024_155127 (1):not paying as much on the EV to sales to growth metric. It's at 0. 63 versus mine says 0. 72 for CloudFlare. In fact, CloudFlare is the most expensive across all of the A number of high growth, grade A companies, Datadog, Zscaler, CrowdStrike.
bruce_1_03-17-2024_185127 (1):They're also the third fastest growing, they're also the third fastest growing company in your
george_1_03-17-2024_155127 (1):No,
bruce_1_03-17-2024_185127 (1):You have to pay a premium for the best. These are call it the, these are call it the ten best companies ish you have a couple outliers here. The ten best companies in enterprise software. They're the third best effectively in
george_1_03-17-2024_155127 (1):but the most expensive.
bruce_1_03-17-2024_185127 (1):you have
george_1_03-17-2024_155127 (1):third best, but you're paying the highest for it. So end of the day, I think what. You have to believe here. If you're going to buy the stock to me is you have to believe they're going to be able to reaccelerate on top of what they did. There's such a market leader. They have such a big Tam. You're going to be able to, they've hit a little blip in 23 and they're going to be able to continue in 24 and their first quarter. And 24 was a nice quarter. So I do think there's some signs there, so I won't be a perma bear here.
gordon--alpha-_1_03-17-2024_165127:any of these names doing that, though. Like what about their multiple is so different that they have to have accelerating growth and nobody else does, or all these guys accelerating growth. Like I just didn't feel like that's a fair question. Your argument falls apart there because you're basically saying, Hey, they're expensive. They're the most expensive, but not that much. They're the ones that have to accelerate just for their multiple. Like, why are they the ones that have to accelerate? This environment, it's accelerating. It's not, maybe open AI. I don't know. Like they probably aren't, they're pretty big bear, whatever the hell they're called Barry. I don't know. Sorry, bear. I'll do my homework on you guys. I know what you do. You're a high flyer. You were. But yeah, there's just, I, so I'm going to call bullshit. There's, I don't know anybody else is doing that in this environment. I will say, and it's not a, it's not a cheap stock in this environment either, but why do you what do you look at and go they have to be, this number tells me that Cloudflare has to be. And accelerate more than everyone else. Like they all look expensive as shit to me.
george_1_03-17-2024_155127 (1):I think for me, it's what else, this is on any metric, this is a premium valuation, right? You're paying let's see, almost 20 times Ford, right? There's very few public stocks that trade at that. This is like the top of the market. And so for me to pay top of the market, yes, the whole market's down, but I want something that's still showing. It's on the upward trend. It's not going down. And there are companies that are doing that. Like our friend NVIDIA. Supermicro!
gordon--alpha-_1_03-17-2024_165127:I feel like you're faking it. Like my wife, I'm really good at sniffing that out. They usually don't care for the podcast. So anyway
george_1_03-17-2024_155127 (1):think given the time I'll stop it short here. My main argument is valuation, right? I think we all agree like Cloudflare is an excellent company. I think they're in an excellent space. I think they will continue to grow for quite some time. It's just, can they grow into this valuation is the main question.
bruce_1_03-17-2024_185127 (1):I, I, so my real view on the company now that I've, finished dismantling George in
gordon--alpha-_1_03-17-2024_165127:stop the fire. You're
bruce_1_03-17-2024_185127 (1):think that, I think similar to what George was saying, cloudflare is priced to perfection in a lot of ways. I think that, they really have to beat their estimates in order to maintain this level, this valuation over the near term. So in some ways, my view is I'm a near term. Bear on the company just because any miss in their forecast will result in what happened to Palo Alto networks, which is just a major drawdown. I think that being said, I'm a long, I'm a long, I'm a long term goal here. So like if there was a company or a couple of companies in cyber security or in broader kind of enterprise software that you want to put money and then forget about over time. I think this is a company that could out outperform over the longer period. So over a 3 to 5 year period, I would expect the company to continue to grow really significantly, even if the multiple comes down. The revenue or the sales will go up really significantly. They've operated, they're extremely proficient at operating. They have a great platform. They have a great product. They're attacking a big TAM. This is a company that you could hold for five to 10 years and expect, I think, to see really significant returns. It's just in the near term, if they have any hiccup, it's going to, it's going to wipe out, I think, a lot of enterprise value.
george_1_03-17-2024_155127 (1):so I will.
gordon--alpha-_1_03-17-2024_165127:a Rip Van Winkle style.
george_1_03-17-2024_155127 (1):I will I think we agreed last time, Bruce, and I'm gonna, I'm gonna agree with you again here. So we'll see if Gordon is in the moment of truth, as we'll call it, is again, differs from us. But I would agree with you. I think I'm in the same boat. There's just not enough that valuation levels. So I would be a buyer if I could find a pullback. For the longterm, I think they're excellent operation. I think the stock is just at a huge premium and the risk is more to the downside at this point. And the perfection is priced in, I'm going to sit and wait. And if it does have that stumble, then that's when I'm going to jump in and buy. But Gordon, what do you think? Listening to the two arguments,
gordon--alpha-_1_03-17-2024_165127:No, I'm just I've always struggled with these High flyers, especially when they've gotten to be 30 billion in value, right? It's a different conversation when you're talking about if, of course the problem with these days, right? A lot of these companies don't go public. You don't get a chance to buy them cheaply. And it's just really hard to find the entry point. The time to buy these guys was I guess it was at the bottom here in the last but certainly wasn't at 200. It's cheaper than it was, but yeah I'm nervous too. Like it just feels to me like this is not these days you've got like Magnuson, however many trillion dollar market cap plus companies, like suddenly like 30 billion, that used to be like a real, like crazy kind of big, like you're playing with the big kids and it's just not that big anymore. And so when you see all these teams. Pretty like focused hands, like GPUs just get insanely large and huge valuations. I'm like, well, maybe trees go grow to the sky these days, but yeah I can't, I would, I'm the kind of person that would buy this thing on a blow up, which, which most would tell you is the worst time to buy this thing. You should sell it and come back. But yeah I start with evaluation. I think it's pretty amazing what they've done. I'm rooting for the independent cloud and for them to be the Amazon and. And I think they want to be good folks too. They've had some embarrassing moments, but what company hasn't lately? But yeah I can't buy this year. I think I'd wait for a pullback, but it's hard to disagree that yeah, this could be a way bigger company and I believe they're going to do that 5 million. I'm not going to bet against that. And so I probably will be higher back then. I just figured I'll probably get a chance to buy it lower between now and then. For what it's worth, but yeah, I think we're all yeah, a consensus. So maybe listeners should go the other way, but we all agree. And it's it's not always actionable. to be like, yeah, none of us want to buy this thing right now. I had a friend on the sell side who used to say, if it's not a buy, then you should like short it because it's a sell. You can't convince yourself this thing should be bought right now. It is a sell. So for what it's worth, the other big thing that we say is a hold is a sell. Most of the sell side likes it. And of course they'll downgrade when they have a blow up. But they also love it, so yeah, I think there's not a whole lot more to say, we watching them but good luck, but any other, I guess we can wrap the show there. I appreciate you guys taking the time on another Sunday and, ripping you away from the green beer, both of you. But we appreciate you stopping in all that good
george_1_03-17-2024_155127 (1):the green beer
gordon--alpha-_1_03-17-2024_165127:Any, parting words? This is probably where you say the slogan about the pigs getting the tip in the pigs or getting slaughtered or something. I can't remember
george_1_03-17-2024_155127 (1):make money, the bears make money, pigs get slaughtered. Until next time,
bruce_1_03-17-2024_185127 (1):Please get slaughtered.
george_1_03-17-2024_155127 (1):you everyone.
gordon--alpha-_1_03-17-2024_165127:Until next time on Just the Tips.
Money Talk-4:Say make money. Money, make money, money, money. Make money. Money make money. Money, money, money makes the world go round. I'm gonna talk around town. Remy