How Cloudflare is going to disrupt Amazon
Cloudflare (NYSE: NET) celebrated its 11th year of existence last week by announcing several new features. Surprisingly, one of them is about to disrupt Amazon‘s (NASDAQ: AMZN) Amazon Web Services (AWS) cloud storage offering.
Let’s see how Cloudflare could capture some of this important cloud storage market. According to AlliedMarketResearch, the cloud storage market is expected to grow at a compound annual rate of 22% by 2027 to reach $ 222 billion. If the company’s new additions are up to the task, it could be a good investment.
An innovative player in the cloud network and security
Cloudflare has built a cloud network in more than 250 cities around the world to accelerate user access to online services. It also provides cybersecurity services to protect the online resources it hosts and manages.
The company has successfully grown its platform with new solutions that generate cross-selling opportunities with its existing offerings. For example, management pointed out during the company’s Investor Day in February that 88% of contract customers use four or more products, up from 70% 18 months earlier. Cloudfare’s innovative offerings also attracted more than 126,000 paying customers, up 32% year-over-year, resulting in revenue of $ 152 million in the last quarter, in 53% year-over-year increase.
But the specialist in cloud networks and cybersecurity is not resting on its laurels. Last week, it unveiled many new products that will take advantage of its existing network infrastructure. The offers included:
- A unique solution that simplifies email security.
- An expansion of its presence to more than 1,000 office locations to further accelerate access to its network. Such a large footprint will differentiate Cloudflare from many competitors that operate with fewer locations.
- A platform for developers to create streaming services.
Disruptive cloud storage challenges AWS
But that was actually another feature that really caught my eye, and it hasn’t launched yet (and the company hasn’t said when it will.) Cloudflare has unveiled a cloud storage offering, Cloudflare R2 Storage, which will allow customers to host any type of file in the cloud. Cloud storage is not a new technology at all – Amazon introduced such a solution in 2006. But the disruptive aspect of Cloudflare’s product is the pricing.
Typically, cloud storage services are billed on a volume basis. Cloudflare will charge for this service at $ 0.015 per gigabit (GB) of data stored per month (As a perspective, a one hour video file of standard quality requires approximately 1 GB to 2 GB of storage.) isn’t trivial because there are so many options that make pricing difficult, but the cloud giant typically charges over $ 0.021 per GB per month for standard storage. However, Cloudflare’s lower storage price isn’t the big deal here. Amazon also charges customers when they remove their files from the AWS environment (egress traffic), which happens when downloading a file hosted on AWS over the Internet, for example.
Although pricing depends on many parameters, AWS charges at least $ 0.05 per GB for data transfer to the Internet for volumes greater than 1 GB per month. So the bill can become large when many users download large files from the AWS environment. Cloudflare has announced that it will offer egress traffic at no cost, which is a huge benefit to customers. The company will leverage its existing infrastructure, agreements and peerings (connectivity) with Internet service providers to support such an initiative.
This should attract developers who are more likely to use Cloudflare’s paid services coupled with the company’s attractive cloud storage offering. AWS includes a large ecosystem of products and services that complement its legacy cloud storage capabilities, which will prevent its customers from immediately switching to Cloudfare. But Cloudflare’s innovative offering may put pressure on Amazon AWS’s high margins in the future.
In the second quarter, AWS’s operating margin reached 28% on $ 14.8 billion in revenue (Amazon is not disclosing the individual performance of its cloud storage business.) However, Cloudflare generated losses which ultimately make the operating margin an inadequate comparison (negative operating margin of 19% during the last quarter.) The negative margin is mainly due to the fact that it has prioritized its growth to gain momentum. This is evidenced by the company’s introduction of several products and its work to implement Cloudfare R2 storage.
Cloudfare is priced for long term growth
Considering Cloudflare’s current operational performance (nearly $ 36 million net loss last quarter), the stock looks expensive. Despite the losses, the stock has risen nearly 200% in the past 12 months, implying that the market sees potential beyond the initial glance. It is trading at a high futures price-to-sell (P / S) ratio of 58 despite falling 16% since September 23 amid the market sell-off in September. In comparison, the competitor of Cloudflare Quickly (NYSE: FSLY) is trading at a less demanding P / S ratio of 14, in part because of its lower revenue growth, however.
Still, investors should consider adding the stock to their portfolio. Cloudflare’s disruptive cloud storage initiative and other new products are expected to continue to attract customers and generate cross-sell opportunities. In addition, its expectation to use existing infrastructure for new products could potentially reduce expenses relative to the revenues it generates. This could help the company as there is plenty of room to grow in its addressable market which management estimates at $ 100 billion by 2024.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.