Where Will Cloudflare Stock Be in 1 Year?

Anand Chokkavelu: Welcome latest Motley Fool scoreboard. I'm Anand Chokkavelu and we've got longtime Fools, Toby Bordelon and Rick Munarriz giving a -10 rating to a money ball wreck. It's Cloudflare, ticker symbol N-E-T. Rate the strength of Cloudflare's business first, including factors like industry and competition. Ten's invincible. A 1 is hopeless, Rick's at a 7, Toby, you're at an 8. Toby Bordelon: Yes, this is I think company is in a very attractive position right now. They've done a good job expanding from their early days into a full connectivity Cloud security operation. The dollar nit net retentions rate for the business is improving. It's growing suggesting that customers are still expanding their usage even now. It suggests a lot of potential for new customers, too, that the company is continuing to attract. The platform includes over 60 services. They serve customers in more than 125 countries. Heavy competition, though, from a lot of different angles. Rick Munarriz: I went with a 7 slightly below, Toby. You don't often see green shoots, blue skies, and pink slips in the same company, but that's Cloudflare's color wheel these days. Cloudflare turned heads 1,100 of them, actually, earlier this year after announcing layoffs in an effort to offload more tasks to agentic AI. Cloudflare did this despite, or one may argue because of its improving fundamentals. I gave it a 7. Anand Chokkavelu: Let's move on to management. A 10 is Warren Buffett. A 1 is Homer Simpson. Rick's at a 5, Toby, you're at an 8. Toby Bordelon: I'm much more optimistic than Rick, I think, here. It's still a founder led business. I like that. You've got CEO Matthew Prince and President Michelle Zatlin both the co-founders there. I like that they're still in charge here. Now, they may be hitting a tough phase with those layoffs Rick talked about. They announced back in May. They framed that as he noted around adapting for an AI first model. We'll see how that goes. The team's done a good job so far, but the test is whether they can take Cloudflare into the next era from here. Rick Munarriz: I did go with a 5. When your CEO is Prince, it's so tempting to quote another Prince. This one from Minneapolis, 2,000 00 Party over oops out of time. Thankfully for your Cloudflare and its shareholders, the party isn't over. Its business is rolling. However, being a leader and replacing humans with AI agents isn't going to make you popular with the real people on the way out. Just half of the employees pulled by Good Glassdoor would recommend working at Cloudflare to a friend. That makes sense. If only Glassdoor could pull the AI agents, burning humans for the sake of efficiency may be inevitable, but it doesn't have to be mean spirited. This is my real knock on Prince. The following is a quote from this Prince from its first quarter earnings call three years ago, explaining how his product is so good that only a lazy sales team can mess things up. This is the exact quote. You'll find it on the transcript in the Investor relation site. They still have it up there. When the fish are jumping right in the boat, you don't need to be a very good fishermen. But at the risk of mixing watery metaphors, as the tide goes out, you get a clear view of who's not wearing shorts. The macroeconomic environment has gotten harder, and we're seeing that some on our team aren't dressed for work. He gets even further than that. But he basically fired 100 of his least productive salespeople during the call. You can fire fishermen without being salty. This is a quality company, but I'm not entirely sold on management and their demeanor. Anand Chokkavelu: For financials, a 10 is a fortress, a 1 is Yikes. Rick's at a 7, Toby, you're at a 6. Toby Bordelon: Yes. The growth is strong right now, revenue up 34% last quarter, 158 million operating cash flow, 84 in free cash flow. Balance sheets okay. 932 million in cash, 3.2 billion in short term investments. But that's about 3.3 billion. That ratio is not quite what I would love. Plus 1.3 billion that comes due this year, so it's something you have to deal with imminently. Could be better. Biggest issue is Cloudflare isn't profitable on a GAAP basis right now. Gross margins are falling too. Also, stock based comp, an issue for some of these SAS live companies higher than I think it should be relative to the free cash flow. There is definitely room for some improvement in the financials here. Rick Munarriz: Here's where I chime in with a higher score than Toby with my 7. Revenue is accelerating for the second consecutive year, something you don't see in many Cloud service stocks these days. Toby is right about the rocky road down the income statement on a reported basis, but betting against a business when it's in a state of acceleration doesn't work out well too often for the nasyers. I'm at a 7. Anand Chokkavelu: Rick, let's talk valuation. How will Cloudflare's stock do over the next five years? How safe is it? Ten sure thing, one' a lottery ticket? Rick Munarriz: I went 10-15% and a safety score of 7. Cloudflare it isn't cheap, but it doesn't have to be. This is a growth stock that is beloved by some of the most valuable companies on the planet. 72% of his business comes from more than 4,400 large companies spending at least $100,000 a year on the platform. That's a big vote of confidence, so I went with a safety score of 7. Toby Bordelon: Same for me in terms of the returns, I think 10-15% there is what we'll probably see. Safety though a little bit lower five, and that's mainly due to the valuation here. It's a high stock price. Rick notes they're growing quickly, and that's true, and that does deserve some optimism, I think. My score of 5 though, is really about the risk of a stock price drop, not a risk to the business itself. I think the business looks safe in terms of staying in power. But I think because of all the optimism around their growth, because of how they've been growing, any slowdown probably hits them hard and you'll see a big hit in the stock price, at least temporarily. Anand Chokkavelu: Thanks to both Toby and to Rick. They've given Cloudflare a decent overall score of 6.8 out of 10. Both preferred CrowdStrike as a top it. Look out for a new scoreboard every market day at 7:00 PM Eastern. Next up is monday.com. Till then, Fool on.