Analyzing Cloudflare's Profitability – A Stock Investor's Perspective

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%.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.