Cloudflare Sets Initial IPO Price Range, Valuing It As High As $3.5B

Cloudflare, a content delivery and Internet security firm, set an initial price range for its IPO this morning. The San Francisco-based company will target a per-share price of $10 to $12 when it goes public in the coming weeks.

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Selling an expected 35 million shares in its IPO, Cloudflare could raise as much as $420 million in the share sale. Add in the 5.25 million shares reserved for its underwriting banks, and the company could gross $483 million at $12 per share, the top of its range.

According to its new S-1/A filing, Cloudflare anticipates having around 293 million shares outstanding when it goes public, valuing the firm between a little over $2.9 billion, and $3.5 billion. Given that the firm was last valued at $3.25 billion while private, it’s quite possible that the firm is hoping to raise its price range, giving it a higher valuation, and one larger than what its March 2019 Series E afforded it.

Cloudflare has raised over $330 million during its life, including capital from Franklin Templeton Investments, Fidelity, Union Square Ventures, and NEA. Early investors include Pelion Venture Partners and Venrock.

Financial Context

Cloudflare generated $129.2 million in revenue during the first half of calendar 2019. That figure resulted in a gross profit of $100.0 million, giving the firm gross margins of 77.4 percent in the period. That’s perfectly fine for a software-style business, even if we have seen the occasional higher figure from companies like Slack.

In the first half of 2019, Cloudflare posted revenue growth of 48.3 percent, along with a slightly higher net loss in dollar terms. The company’s net loss in percent-of-revenue terms fell from 37.3 percent in the first half of 2018 to 28.5 percent in the first half of 2019. Both figures, however, represent deteriorations from prior results, most especially the company’s 2017 results. In that year, Cloudflare grew revenue from $84.8 million to $134.9 million while losing just $10.8 million on a net basis.

What’s driving the rise in losses measured in dollar, and not percent-of-revenue terms at Cloudflare? One answer is rising sales and marketing costs. In the first half of 2019, Cloudflare’s sales and marketing line item rose to 52 percent of revenue, the highest result listed including data going back to 2016. The company notes that sales and marketing headcount saw a “57 [percent] increase” from the first half of 2018 to the first half of 2019, for example.

But as we noted in our first coverage of the company’s results, accelerating revenue growth and falling operating cash burn are an attractive pair.

The above figures are largely what we already knew, but better framed today in the context of the firm’s prior, private valuation ($3.25 billion) and its new IPO price range ($2.9 billion to $3.5 billion). Has the firm generated material value gains since that Q1 2019 private market price; and if so, how much?

If I was a gambling man, I’d wager $1 that we’ll see another S-1/A from Cloudflare with a new price range.

Illustration: Li-Anne Dias.