What Cloudflare’s Earnings Tell Us About High-Growth, Unprofitable Unicorns

Update: After rising in after-hours trading, shares of Cloudflare are down as we prep the Daily for publication. Take the final section of this post with needed salt given the market’s seemingly changed mood.

We’ve been tracking the revenue multiples of SaaS companies broadly, and the 2019 IPO class more specifically over the past few months. We’re working to understand why some companies have solid IPO pricing runs, only to struggle as public companies. SmileDirectClub, Uber, Slack, and others have suffered from share-price declines from early highs, for example.

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Today Cloudflare, another 2019 IPO, reported its first set of earnings. Let’s quickly peek at the figures, examine the market’s reaction, and then tie the package back to our revenue multiple question and see what we can suss out for private companies.


In the third quarter, Cloudflare’s revenue grew around 48 percent to $73.9 million from a year-ago result of $50.1 million. The company’s gross margin came in at 78.3 percent, with the firm noting a “non-GAAP gross-margin of 78.9” percent in the same period. Both are improvements over year-ago results.

The company’s GAAP loss expanded ($40.9 million in Q3 2019 compared to $38.0 million in Q3 2018). Its adjusted losses worsened as well, with the firm losing $18.5 million on an adjusted basis in the quarter, up from $13.4 million in the year-ago period.

Given that the company’s revenue growth came in ahead of expectations (Yahoo Finance’s tally had an average expectation of $69.7 million listed before the report) it’s doubtful that Cloudflare will be dinged too much for a small boost to its adjusted profit. If you are going to lose more money over time, coming in ahead of growth expectations is always welcome.

Cloudflare, therefore, is a company with strong, software margins that are improving as it grows more quickly than expected; those tailwinds are partially offset by rising losses. Now let’s talk reaction.

Multiples And Context

Cloudflare stock is currently up just under 6 percent to $16.83 per share. Recall that Cloudflare priced at $15 per share, above its raised range (the firm’s initial pricing estimate looks somewhat modest in contrast to recent results).

Now, to the things that we care about. First, know that Cloudflare is a richly-valued, growth stock. Going into earnings, YCharts data indicated that Cloudflare had a trailing revenue multiple of 16. The company’s new, record quarter (in revenue terms) will limit that figure some, but it remains richly-valued.

The lesson for late-stage companies eyeing Cloudflare’s recent IPO (a success in terms of pricing and initial market response) is that you can still lose increasing amounts of money in 2019 (on a GAAP and adjusted basis) provided that you have high gross margins and quicker growth than the market expects.

That’s a very risk-on note, mind. And this result, coming on the heels of the WeWork implosion, pushes back against the new idea (from private investors no less) that growth is out of favor and profits ascendant.

Illustration: Li-Anne Dias.


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