Cloudflare (NYSE: NET) Investment Thesis - Part 1
History of Internet and Cloudflare
In a recent interview with Twilio's founder, Jeff Lawson, he shed light on three pivotal and scalable businesses within the realm of technology, each reshaping the landscape in its own right.
The first of these is "Business Development as a Service." In the past, developers lacked the empowerment necessary to test their ideas effectively. However, with the advent of platforms like Twilio, Stripe, and Plaid, the dynamics have shifted. These platforms not only simplify the process of idea testing but also pave the way for turning innovative concepts into viable business opportunities. In my previous posts, I have delved extensively into the transformative impact of Twilio on this front.
The second scalable business model on the horizon is "Algorithm as a Service." This involves providing unique AI models or scalable data warehouse solutions. I plan to explore this fascinating area in detail in a future post.
The focus of this particular post centers around the third scalable business model, namely, "Opex as a Service." This type of business involves the transformation of what was once considered capex into opex. Cloudflare stands out prominently as a player in this arena, leading the charge to unbundle complex network hardware. The shift from traditional capex-heavy models to the more flexible opex approach has not only streamlined operations but has also opened up new avenues for businesses to thrive in the ever-evolving technology ecosystem. Cloudflare's innovative approach to untangling the intricacies of network hardware exemplifies the transformative power of Opex as a Service.
Although Cloudflare might not be a household name for many, its impact on the digital landscape is both pervasive and profound. If you've ever gone through the 'I'm not a robot' verification process on ChatGPT, you've directly experienced the robust security solutions meticulously crafted by Cloudflare. Beyond this, consider your routine internet browsing—more than a 20% chance exists that the websites you interact with are fortified by Cloudflare's cutting-edge CDN & DDoS attack mitigation solutions.
In the upcoming four-part blog series, I'll unravel the details. To kick things off, let's embark on a historical lesson.
History of Internet
In the pre-Internet era, computer applications operated as "fat clients," processing data on individual personal computers within localized, on-premise infrastructure. The server primarily served as data storage within a company's private network, with distinct roles for IT professionals. Developers focused on client-side software, while Database Administrators (DBAs) managed server data, emphasizing limited connectivity and clear roles within the IT domain.
The advent of the Internet shifted application architecture to web browsers, with powerful web servers in data centers handling the heavy lifting. This transition facilitated universal access to applications, leading to the split of developers into front-end and back-end roles. As web browsers advanced, front-end developers gained autonomy, making websites more interactive. Mobile apps introduced a paradigm shift with offline capabilities, relying on web servers for data access. This led to the widespread use of REST-based APIs, unifying data access patterns across web and mobile apps. The rise of the cloud transformed application hosting, with companies renting server space, simplifying infrastructure management, and reducing the need for server ownership.
The evolution extended to network infrastructure and security protocols, breaking free from local confines to span the globe. Networks fostered global connectivity and decentralization, incorporating high-speed data transfer, mobile networks, and the Internet of Things. Simultaneously, the security landscape evolved, grappling with challenges like cyber threats, phishing, and hacking. Encryption standards, firewalls, and intrusion detection systems became pivotal in safeguarding against unauthorized access and malicious activities.
Further evolution in application architectures led to microservices, API-driven development, and diverse data storage solutions. Data centers gave way to cloud computing, enabling developers to create their database instances. Hyperscale cloud providers introduced Database-as-a-Service (DBaaS) offerings, simplifying database management. The emergence of edge networks, exemplified by companies like Cloudflare, ushered in a new phase of data storage independence, combining content delivery, compute, and data storage for distributed edge applications. Decentralization became a recurring theme, driven by changing work patterns, connected devices, and data generation.
History and Business Model of Cloudflare
Established in 2009 by Matthew Prince, Michelle Zatlyn, and Lee Holloway, Cloudflare is driven by a fundamental mission to enhance the Internet experience. Rooted in the recognition that the Internet fell short of its potential, Cloudflare was founded to tackle two critical pain points: (1) the pervasive security threats faced by websites and online applications, coupled with a lack of user-friendly solutions; (2) and the absence of a dependable, scalable network infrastructure to manage escalating internet traffic, resulting in sluggish website performance and inefficient content delivery. Against the backdrop of a technological paradigm shift, where traditional software transitioned to SaaS applications and physical servers migrated to public cloud instances, Cloudflare anticipated the evolution of network appliances into cloud services. To address these challenges, Cloudflare strategically built its own network, positioned alongside servers with Internet Service Providers, maximizing efficiency.
Recognizing the pivotal role of data as a core advantage in the cloud era, Cloudflare strategically employs a freemium and land-and-expand business model, propelling user adoption to over 4 million since its inception. Presently, the company operates a global network, encompassing 300 Points of Presence (PoPs) across more than 120 countries. Cloudflare offers a comprehensive suite of website and application services, ensuring the safety, speed, and reliability of external-facing infrastructure exposed to the Internet. Among its key product offerings are a robust web application firewall, efficient bot management, DDoS protection, and API gateway solutions. Additionally, Cloudflare enhances performance through content delivery, load balancing, and smart routing services. This multifaceted approach positions Cloudflare at the forefront of providing essential solutions for the evolving demands of online infrastructure.
Pioneering a new era of cloud-based network-as-a-service solutions, Cloudflare introduces zero-trust services, elevating security in a decentralized landscape heightened by the surge in remote working and IoT. By harnessing the potential of their serverless platform, Cloudflare empowers developers to craft scalable applications seamlessly, unburdened by infrastructure intricacies, delivering instant global scalability and high-performance applications. At the core of this platform is the Cloudflare Workers product, which competes effectively with public cloud vendors for storage and compute workloads, offering competitive pricing and enabling the creation of applications previously deemed unattainable on traditional public clouds. Cloudflare's commitment to enhancing the Internet experience extends to providing users with the flexibility to start with a single product and effortlessly expand over time, underscoring their dedication to simplicity and user-centric evolution.
The tangible impact of Cloudflare's platform-centric approach is evidenced by the fact that over 30% of Fortune 1000 enterprises are counted among Cloudflare's clientele, and more than 20% of the world's top million websites utilize at least one of Cloudflare’s products. This widespread adoption attests to the platform's effectiveness and Cloudflare's pivotal role in shaping the contemporary Internet landscape.