Shares of Large-cap Software company Cloudflare were up 5.8% during today's afternoon session, as the S&P 500 posted a -0.0% change. Today's upwards movement shows that investor interest in NET stock is strong -- but how closely have they studied the company's margins?
While Cloudflare's gross margins for the last year are positive, we are concerned that the company's operating margins are in the red. Gross margins take into account only the cost of revenue, or variable costs -- meaning the cost directly associated with producing the products or providing the service offered by the company.
Operating margins, on the other hand, take into account the company's overhead as well. Overhead, also called fixed costs, includes the company's rent, salaries for personnel not included in cost of revenue, equipment and supplies, amortization, and depreciation. Operating margins tell you about how efficiently Cloudflare is run, and gross margins tell you how profitable its product line is.
| Date Reported | Revenue ($ MM) | Cost of Revenue ($ MM) | Gross Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2021-12-31 | 656 | 147 | 77.59 | 1.35 |
| 2020-12-31 | 431 | 101 | 76.56 | -1.72 |
| 2019-12-31 | 287 | 63 | 77.9 | n/a |
Cloudflare's gross margins are currently in the green, but this might not be the case for long. Since its cost of revenue is growing at a rate of 52.5% compared to 51.2% for its revenues, its gross margins have been shrinking -0.2% on average each year.
| Date Reported | Total Revenue ($ MM) | Operating Expenses ($ MM) | Operating Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2021-12-31 | 656 | 637 | -19.45 | 21.48 |
| 2020-12-31 | 431 | 437 | -24.77 | 34.14 |
| 2019-12-31 | 287 | 332 | -37.61 | n/a |
The table above tells us that, on average, Cloudflare has not been profitable over the last four years, which should be a warning sign to prospective investors. One bright spot, however, is that the company's operating margins are growing at an average yearly rate of 27.8%.
