Why We're Considering Trimming Cloudflare (NET Stock), Not Buying More

Okay everybody. Hope you're doing well. We talked about doing something a bit different once we relaunch the research dashboard at the beginning of September, but before we even do that, I thought we'd try out a different video type, just doing a live research project, or in this case a live update to some past research. We've got a number of questions on content delivery networks or CDNs, a type of very critical, crucial internet infrastructure that handles everything from website traffic to cloud-based software, and now even more advanced than that, AI-based software, massive amounts of data getting moved around the internet. How do companies actually get that work done? Where does a CDN come into play? Let's start with the basics here. What is a CDN or content delivery network? A CDN is a service where a network server or group of network servers is installed in a colocation data center close to the end user. This is an image from Cloudflare. This is their global network. And so this colocation, CDNs, their network servers might be installed and operated in an Equinix or a Digital Realty, or an NTT data center somewhere. Here's a look at the one from Akamai. They have these edge POPs, points of presence, their core network as well. Akamai also provides some actual cloud services. And then the one from Fastly, which looks pretty similar. And so what does this do? What's the point of this? Maybe your website is primarily located in a data center, let's say a website hosting service data center located in the United States, but you have users in Europe. Let's say they wanna visit your website. Rather than having to wait around for the page to load from the server in the US, well, there's a copy located close to them on the CDN in Europe. These services will also help websites or cloud-based software services, cloud infrastructure providers like Amazon, Google Cloud, Microsoft Azure. They help them manage bandwidth costs, data transfer costs, and load times for their users, which improve performance. And to stay competitive, modern CDNs have progressively added more and more services like cybersecurity or especially in the case of Cloudflare. They've added a lot of AI products as well that are aimed at developers looking to secure their AI workflows or actually build their AI workflows like Cloudflare's Workers platform. Akamai has largely built these extra products and services via acquisition. Fastly, also kind of more of a next-gen CDN service. Also lots of various products in here: the basic CDN, cybersecurity, some compute products as well. They're getting a bit into compute, allowing customers to perform some compute directly at the network edge, and then observability, which we've talked about before. So that's an overview of the CDN market and where we're at. The research dashboard next. Under Market Analysis, Compare Companies, I've loaded up the three leaders. I loaded them up in terms of size by market cap. So I started with Cloudflare, then Akamai, and then Fastly, and here they are. We've got some financial breakdowns of each, and this is pretty wild. Cloudflare now trading at over $110 billion market cap, compared to the far older, more mature, and frankly much larger by revenue company, Akamai, at just under $18 billion, and then the small upstart at under $5 billion, Fastly. Yes, the revenue for Cloudflare is much smaller than Akamai's, but see how they're catching up so quickly. Revenue growth just over the last twelve months at 33.5%. They just reported, Q2 2026, and still north of 30% revenue growth. So before too long, the market fully expects Cloudflare will far exceed Akamai's revenue because they're growing at a mid-single digit pace. Fastly has re-accelerated as of late, which is fantastic if you've been a long-suffering Fastly shareholder. Accelerated back over 20%. And then, gross margin is not going to pay the bills, operating profit margin and free cash flow will. But you can see, Cloudflare's trajectory as it continues to grow, the gross margin is far higher than its two peers as well. So yes, while GAAP operating margin is negative 14%, most of that is employee stock-based compensation, which is a different risk that needs to be accounted for, especially doing profit on a per share basis to account for dilution. It's not hard to imagine this company's operating margin eventually far exceeds that of even legacy Akamai. And you can see it already in the free cash flow margin at 14% over the last twelve-month period, 22% for Akamai and Fastly at just shy of 7.5%, though that is also probably going to be improving here, as they pick up some steam again. And then finally, net cash, or in the case of Akamai, net debt of 4.2 billion. I mentioned they've largely built their new next gen services via acquisition, including getting into cloud infrastructure and cloud compute services. That is the result here, 4.2 billion net debt over cash and investments. So even here, Cloudflare wins plenty of net cash on balance to help them support this very fast pace of revenue growth and what could potentially be a really, really profitable, really lucrative business. Let me go back to the revenue here. Just some charts to give you the additional modeling on the trajectory of where the businesses are headed. Especially on revenue, this is why the market has valued Cloudflare so high. The expectation is this revenue far exceeds Akamai over the course of the next decade and is robustly profitable, as they've steadily made progress on that front. So that's a brief look at these three companies. We can dig a little bit deeper here. So under company analysis, I have Cloudflare pulled up, scroll to the bottom, and we have this financial dashboard. So as of the end of June, the market cap was still at high 80 billion range, which based on the last revenue, we're looking at 30, closer to 40 times price to sales. Price to free cash flow, yes, they are free cash flow positive, but I mean, 250X, not super meaningful. This is maybe a candidate we would look at trimming if we needed the cash in our portfolio. It's been a pretty fantastic run for Cloudflare since we initially purchased it seven, eight years ago, and we're most definitely interested in still holding onto it. We do believe that ultimately portfolio allocation, especially centered around secular growth trends, secular growth themes, which next gen CDNs are very much part of that. Upgrading the internet to be able to handle all of this new AI content is certainly, going to be part of that. But the position has obviously outgrown many others and so this would be a candidate for maybe trimming. Do we allocate to Fastly, which is trading at a relative discount? Maybe. Some pretty healthy growth happening at Fastly again. Maybe this is one worth adding to a small cap, small bets basket. Now, of the three, Akamai is the one we're personally not interested in. Generally speaking, we don't try to purchase assets that could be labeled as distressed or underperforming. However, perhaps those acquisitions are about to lead to an acceleration in growth as well. Maybe it will help them begin to repair their balance sheet and all that net debt, which would leave them at a long-term disadvantage, versus some of their younger, scrappier peers that have net cash on balance. So if that were to happen, maybe that would be of interest, at least for us. If you're looking for turnaround stories, if that's your style, Akamai may fit the bill. Maybe it's a potential value stock if they're able to reinvigorate some growth and some profit growth and begin to turn things around. All right, so that is a look at the current state of the CDN market, using the new research dashboard.