Large-cap Data Processing Services company Cloudflare is down -2.2% during this morning's trading session, while the S&P 500 moved -1.0%. With last year's reported gross margins at 76%, you might be wondering if today's drop is an opportunity to pick up shares of a profitable company at a discount.
Gross margins give insight into the basic economics of the company' product line and its pricing power in the target market, yet it's essential to balance this with a review of Cloudflare's operating margins. Operating margins take into account the company's fixed overhead costs, in addition to the cost of revenue used to calculate gross margins.
Is Cloudflare plagued with bloated overhead expenses that are eating away at an otherwise profitable business? Or is the company currently unprofitable because it is in a growth phase? A combined analysis of both gross and operating margins can help answer these questions, so that you understand what kind of business you are investing in.
| Date Reported | Revenue ($ k) | Cost of Revenue ($ k) | Gross Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2023 | 1,296,745 | 307,005 | 76 | 0.0 |
| 2022 | 975,241 | 232,610 | 76 | -2.56 |
| 2021 | 656,426 | 147,134 | 78 | 1.3 |
| 2020 | 431,059 | 101,055 | 77 | -1.28 |
| 2019 | 287,022 | 63,423 | 78 |
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 39.0% compared to 37.9% for its revenues, its gross margins have been shrinking -0.5% on average each year.
| Date Reported | Total Revenue ($ k) | Operating Expenses ($ k) | Operating Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2023 | 1,296,745 | 1,175,225 | -14 | 33.33 |
| 2022 | 975,241 | 943,834 | -21 | -10.53 |
| 2021 | 656,426 | 636,976 | -19 | 24.0 |
| 2020 | 431,059 | 436,772 | -25 | 34.21 |
| 2019 | 287,022 | 331,545 | -38 |
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 18.4%.
