Cloudflare (NYSE:NET) has rewarded shareholders with over 444% growth since going public in September 2019. With the pandemic-accelerated reliance on internet-based services, that growth trajectory has accelerated. NET stock has delivered a return of 173% over the past 12 months alone, a rate that is attracting the attention of many investors. Cloudflare is a CDN (content delivery network) and more. While the CDN helped keep your online shopping experience snappy and your streaming video lag-free, the “more” aspect of Cloudflare’s business model is going to become increasingly important over time.
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There are a number of CDNs to choose from, but Cloudflare currently has the lead in terms of marketshare. That’s a whopping 81.2% of websites that use CDNs according to data from January.
However, this dominance doesn’t mean competition isn’t an issue. Not only are there strong competitors among CDN players, but some of the world’s largest tech companies also offer CDN services. That means there is some element of risk.
Still, NET stock is a relatively safe bet with excellent long-term growth prospects. That combination put it on my recent list of safe stocks for retirement. Let’s take a closer look at the company.
Outages a Reminder We Are Increasingly Reliant on CDNs
Many people have never heard of a CDN. That’s the nature of the business. These technology companies work behind the scenes to make websites and internet-based services fast and responsive, no matter where you access them from. However, every once in a while we get a pointed reminder of the increased importance of CDNs.
The latest such reminder came a week ago when one of Cloudflare’s CDN competitors experience a technical issue. As a result, a swath of websites, e-commerce sites, apps and streaming services were knocked offline for an hour. Cloudflare customers experienced a similar situation last July, when an outage caused a 50% traffic drop across multiple sites and countries, lasting for 27 minutes.
NET stock actually popped after both incidents. That likely reflects a recognition of the importance of CDNs, plus the speed with which the issues were resolved.
Risk of Competition, But Cloudflare Has a Strategy
One of the big risks of this increased reliance on CDNs is competition. It’s not just other pure-play CDNs that Cloudflare has to watch — it’s also the tech giants. Several of these companies are cloud computing powerhouses and offer CDN services as well. Should the increased visibility of CDNs pique their interest enough to ramp up their efforts in the market, that could be bad news for companies like Cloudflare.
However, Cloudflare isn’t sitting still. The company also offers cloud-based enterprise network and security solutions. If anything, Cloudflare is ramping up to be able to take marketshare from cloud hosting companies rather than the other way around. This strategy makes NET stock less exposed to competitive risk than other CDN stocks.
Bottom Line on NET Stock
In December, Forbes published an article calling Cloudflare “the most important Net infrastructure company most people have never heard of.” The pandemic taught us that CDNs are more important than ever. The latest big CDN outage — although nothing to do with Cloudflare — showed once again, how critical these services have become. They will continue to grow in importance as we become more reliant on the internet for everything from shopping, to streaming video to remote work.
Cloudflare rode that wave of increased reliance on CDNs to 50% revenue growth in 2020 and 203% growth in NET stock value over the past 12 months. By combining traditional content delivery functionality with security, privacy and enterprise network features, Cloudflare is uniquely positioning itself to stand out from the competition. This strategy isn’t a guarantee that one of the cloud computing giants won’t turn its attention to dominating the CDN market. That’s a risk for Cloudflare investors. But Cloudflare’s approach makes it much more resilient to CDN competition.
Among investment analysts polled by the Wall Street Journal, NET is a consensus “Buy.” In Portfolio Grader it rates a ‘B.’ If you’re interested in internet stocks and CDNs in particular, NET stock is definitely worth considering for your portfolio.
On the date of publication, Louis Navellier had a long position in NET. Louis Navellier did not have (either directly or indirectly) any other positions in the securities mentioned in this article. InvestorPlace Research Staff member primarily responsible for this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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