alt Hacker NewsIn an April 2002 interview with Bloomberg Businessweek, Scott McNealy, then CEO of Sun Microsystems, reflected on investors paying 10x revenue for Sun stock at its dot-com peak ($64/share in 2000):
At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don't need any transparency. You don't need any footnotes. What were you thinking?
Now this analysis is imperfect... but it's good enough.
For reference Cloudflare trades at 39x revenue
Replies
That analysis completely neglects growth.
Obviously you wouldn't pay 10x revenue if you expect revenue to be flat for the next 10 years.
No wonder that company no longer exists with a CEO that doesn't get that.
"In the short term the market is a popularity contest; in the long term it is a weighing machine." - Warren Buffett
Here's the valuation though. Percentage of total web traffic going through Cloudflare.
- 2016 ~3.9%
- 2017 ~5.3%
- 2018 ~6.6%
- 2019 ~7.6%
- 2020 ~11.2%
- 2021 ~15.4%
- 2022 ~19.4%
- 2023 ~18.0%
- 2024 ~18.9%
- 2025 ~19.2%
- 2026 (early) ~20.9% (with later snapshots higher, up to the mid-to-high 20s)
Combine that with consistently excellent execution and popularity, you get the valuation.
Disclaimer that I'm a long-term Cloudflare holder, and that I've also sold NET in the past year.
I empathize with this view, however it is very hard to value businesses that have extremely high margins, and who grow revenue very quickly on existing products while they're adding additional products.
I don't think NET is a steal at 39x revenue. But at no point in the last 5 years has NET been available to purchase for <15x revenue [1].
During that time, it has had Gross Margins in the exceptional range of 70%-75%, and YoY quarterly revenue growth in the similarly exceptional range of 25-40%, which has increased in our post-AI agent software economy.
If you're a Ben Graham acolyte, you would have sat out of NET since it's IPO. However, if you're a Charlie Munger/Buffet admirer who understands the pivotal role NET plays in the software ecosystem (i.e. it's inside your "circle of competence"), you'd do well to consider the Mungerism:
"Forget what you know about buying fair businesses at wonderful prices. Instead, buy wonderful businesses at fair prices."
That still leaves as an exercise to the reader what a "fair price" is for NET, but (to me, at least) it's clearly a wonderful business.
[1]: https://www.macrotrends.net/stocks/charts/NET/cloudflare/pri...