Cloudflare, Inc. (NET)

The value today by multiples ($55) is below the market price ($351). The present-value lens does not apply to this company, so the contrast between methods is unavailable.

Today — expensive, no margin of safety: at $351 trades ~541.1% above its value discounted to today (~$55); the expected return does not even reach the risk-free rate (4.5%).

At 5 years — Sobrevalorado: the expected total return is negative — the price already discounts a demanding scenario that, if not met, results in a loss.

The bridge: the return at 5 years falls below the risk-free rate (4.5%) — which is why there is not even a discount to today's value. To require a 15% annual return, it would need to be bought at ~$34.

Educational / informational. Does not constitute investment advice.

Year-by-year projection of the selected scenario. From each year, two versions of the flow are derived: growth FCF (operating flow − total capex, the cash surplus) and maintenance FCF (the owner earnings: what the business yields if it only sustains its capacity). Cash accumulates the retained surplus —what is not returned as dividend or buyback—, so that EV falls and multiples compress going forward. The valuation is done on FCF de mantenimiento (neto de compensación en acciones). In edit mode, revenue, margins, capex, and exit multiples can be adjusted.

The valuation metric is maintenance cash flow net of stock-based compensation: the model's operating flow margin series is not reported operating flow but that flow already net of stock-based compensation, which at this company equals 20.2% of revenue and 145.7% of reported free cash flow. Without that deduction the metric would count as shareholder cash a salary paid in ownership. Hence year zero is negative: operating flow of US$633.4 million less stock-based compensation of US$507.7 million leaves US$125.8 million, and against maintenance capex of US$142.5 million (half of the US$285.0 million invested in the twelve months to June 2026) the result is US$-16.7 million. It is not a data-entry error: it is the economics of the company today. The path of stock-based compensation over revenue in the base case, declared year by year: 20.2% in year zero, 19.0%, 17.5%, 16.0%, 14.5% and 13.5% in year five. The gross operating flow margin follows with 25.2%, 27.5%, 29.0%, 30.0%, 30.5% and 31.0%, so the model series' net margin comes to 5.0%, 8.5%, 11.5%, 14.0%, 16.0% and 17.5%. In the bear case that compression does not occur: compensation holds close to 20% of revenue and the net margin reaches barely 9.5% in year five. The bull case takes it to 12% with a gross margin of 34%. The revenue path starts from the company's own guidance and not from the last fiscal year's trajectory: the release of 6 August 2026 sets revenue of US$2,864 to US$2,870 million for calendar year 2026 and US$736 to US$737 million for the third quarter, which implies growth of close to 30% in the second half of the year against 33.5% for the rolling twelve months. The model's year one, which is the twelve-month window to June 2027, is anchored to that 30%. The 1.9% tax rate is not an income statement effective rate —with negative pre-tax income that ratio means nothing— but the ratio between the tax provision actually recorded in the twelve months to June 2026 (US$8.3 million) and the non-accounting operating income guided for the full year (US$444 million); it reflects the accumulated deficit of US$1,204.9 million that defers tax payment. Cash accumulates the model's surplus: the company pays no dividend and repurchases no shares, and the dilution from stock-based compensation is not modeled in the share count because its cost is already charged within the metric. Other declared conventions: year zero's accounting operating income includes restructuring charges of US$150.7 million recorded in the first half of 2026 and is not adjusted for them; the change in working capital is taken as zero in the owner earnings detail because the metric starts from operating cash flow, which already incorporates it; and the current financial cost is taken as zero because all of the debt is convertible obligations with a 0% coupon. The balance sheet is held at 30 June 2026 and does not incorporate two subsequent events declared in the risks: the issuance of US$2,500 million of 0% convertible obligations maturing 2031 on 13 August 2026 and the approval of proposals 4A to 4F at the meeting of 30 June 2026.

Today's elevated multiple is the price of growth: if the business grows, the entry point cheapens on its own going forward (EV falls as cash increases). The exit multiple at 3 years is higher than the terminal at 5 years —at 3 years there is more growth still ahead—, so the value curve shows whether value creation is concentrated in the early or the later years. The required return is applied to the base scenario.

They are valued separately, with their own rationale, and are not incorporated into the base or the verdict (they are excess return). When assigning them value — in Editmode —, the total with optionalities updates live, without moving the base.

The verdict, the base CAGR, and the margin of safety are always calculated on the base; optionalities do not alter them (with optionalities at $0 they do not move).

Each card fixes a required annual return and answers: if the business is worth $68 in 5 years, what is the maximum that can be paid today to obtain that return? Since it now trades at $351, the margin of safety is how much cheaper the market is than that maximum. The three thresholds: 4% covers inflation (the floor), 10% is the long-term average return, and 15% is the level of a great investment.

With a target price of $68 in 5 years and a required return of 4.5% annually, the maximum to pay today is $55. Against the current market price ($351), the margin of safety is -541.1% (trades above the maximum → a premium is paid) and the total return at that price would be -27.9% annually.

• Estimated five-year total return. -28% annually in the base case, with -28% in the adverse and -28% in the favorable: all three fall below the 4% floor.
• Entry multiple. Today's multiple is not interpretable because year-zero cash flow is negative; on the base case's year-five cash flow, the entry point equals 142×.
• Exit multiple. 26 times maintenance cash flow net of stock-based compensation, within the 20-to-30-times band of the enterprise software archetype and close to the position suggested by terminal growth and the moat.
• Cash flow yield. The base case's year-five maintenance cash flow, already net of stock-based compensation, yields less than 1% on the current market value.
• Sensitivity to the compensation assumption. Each point of revenue that stock-based compensation stops consuming adds close to US$72 million to year-five cash flow: it is the assumption that moves the result the most.

Each margin over sales, year by year: historical (solid line) → projection (dotted).

• ✕ ROIC exceeds the cost of capital (~10%)
• ✕ CFROIC backs up the ROIC (0%, cash vs. accruals)
• ✓ Healthy balance sheet (low corporate debt)
• ✓ Durable competitive moat (multiple advantages)

• Cash generation. Operating cash flow is US$633.4 million in the twelve months to June 2026, but it includes the US$507.7 million add-back of stock-based compensation: net of that cost, generation is US$125.8 million.
• Return on capital. Negative, with GAAP operating income of US$-354.4 million on invested capital of US$727 million. Against the 10% bar, the company does not yet reach it.
• Cash conversion. Reported free cash flow of US$348.4 million coexists with a net loss of US$206.3 million: the gap is stock-based compensation added back, not a working capital advantage.
• Reinvestment runway. The developer platform and artificial intelligence services open a much larger addressable market than the original application security, and capex grew from US$114.4 million in 2023 to US$285.0 million in the twelve months to June 2026.
• Predictability. High on revenue, due to the contracted base and 120% net retention; low on the bottom line, due to the US$150.7 million restructuring in the first half of 2026 and the variable magnitude of stock-based compensation.

Annual levels from the official filing (10-K); the % over each bar is the year-over-year (YoY) growth vs the prior year.

Growth breaks down into customers times average spend: paying customers multiplied by average account revenue, with net dollar retention measuring how much the existing base expands before adding new accounts. Large customers are the main lever, because they concentrate cross-selling within the same control panel. The leading indicator is the growth of current remaining performance obligations, 35% year over year as of the second quarter of 2026: it is revenue that is contracted and not yet recognized, and that is why it anchors the trajectory of the early years to signed contracts rather than to trend extrapolation.

The % are the annual (year-over-year) growth: each year —historical and projected— vs the prior one; the TTM (trailing 12m) vs the TTM of a year ago, to avoid overlapping windows. The historicals are exact figures from the official filings; the projected years come from the year-by-year model (the intermediate years without their own series are interpolated between the anchors). The projected columns (+1y…+5y) are 12-month windows counted from the TTM close (30-jun-2026): the projection starts from the most recently reported data, not the fiscal year. The projected base is realistic and unbiased — the risk discount is applied at the end, via the required return. The rationale for each metric is in the (i).

• Recent growth. 33.5% in the twelve months to June 2026, against 29.8% in 2025, 28.8% in 2024, and 33.0% in 2023: the trajectory is high and stable within a narrow band.
• Company guidance. US$2,864 to US$2,870 million in revenue for calendar year 2026 and US$736 to US$737 million for the third quarter, implying close to 30% in the second half.
• Contracted revenue. Current remaining performance obligations grow 35% year over year as of the second quarter of 2026: the leading indicator runs ahead of recognized revenue.
• Account expansion. Net dollar retention rose from 111% at year-end 2024 to 120% at year-end 2025, and customers above US$100,000 annualized rose from 2,756 to 4,298 in two years.
• Deceleration risk. The annual report itself warns that the growth rate has already decelerated in the past and that historical comparisons may not be representative of future performance.

• Revenue recurrence. Subscription and consumption on one- to three-year contracts, with current remaining performance obligations growing 35% year over year: next year's revenue is largely contracted.
• Differentiated product. The unified platform replaces several point solutions within a single panel; the annual report itself describes global configuration deployment in seconds versus hours for the alternatives.
• Pricing power. Limited: the annual report acknowledges competitors capable of selling equivalent products at zero or negative margin or of bundling them with the rest of their offering.
• Customer concentration. No single customer exceeded 10% of revenue in 2023, 2024, or 2025, with 332,466 paying accounts in more than 190 countries.
• Operating leverage. The homogeneous architecture allows new products to launch on the existing infrastructure; the plan announced on May 7, 2026 cuts headcount by approximately 20% to move to an operating model centered on agentic artificial intelligence, with estimated charges of US$140 to US$150 million, and the lever is not yet visible in GAAP results.

Not all debt is equal: only the structural needs refinancing; the rest is operational (self-liquidating).

Structural debt is what is exposed to the contraction phase of the cycle; operational debt (leases, matched funding) self-liquidates with the business.

• ✓Leverage (net debt / EBITDA)Net cash $0.9 bn
• –Interest coverage (EBIT / interest)no data
• –Liquidity (current ratio)no data
• –Cash quality (CFROIC vs ROIC)ROIC ≤ 0 (see value creation)
• ✕Value creation (ROIC − 10% bar)-58pp
• ✓Malinvestment test (capex vs incremental ROIC)Capex/D&A 1.3x
• –Float / working capitalNeutral WC
• ✕Dilution (SBC % of revenue + shares)SBC 20.2% of revenue

A traffic-light interpreted by the method (not generic): float (negative WC) adds up, capex is judged by incremental ROIC (malinvestment test), and a lender is not subjected to corporate solvency. The (i) shows the derivation of each number.

• Cash and investments. US$4,163 million between cash and liquid investments as of June 30, 2026, plus US$2,462.3 million net added in August from the convertible issuance.
• Debt. US$3,270 million as of June 30, 2026, entirely in zero-coupon convertible notes, so current financing cost is minimal.
• Maturities. As of June 30, 2026: US$1,293.3 million of 2026 notes and US$1,977.0 million of 2030 notes. By August 13, 2026, the 2026 notes —convertible since May 15, 2026 at US$191.34 against a share above US$300— had fallen to US$1,125 million through conversions of about US$169 million, and an additional US$2,500 million maturing 2031 was issued at a conversion price of US$496.94.
• Self-funding. Reported free cash flow is positive at US$348.4 million, but net of stock-based compensation, owner generation is still negative.

How cash comes in and how it is deployed. In green, the business's own cash (the owner-FCF it generates and reinvests); in gray, the float and credit — customer and funding money, which is not the shareholder's.

Capital allocation is entirely reinvestment. The filings show no dividend or material share buybacks: the buyback recorded in the cash flow statement is US$3,000 in 2022 and US$34,000 in 2023, and zero in 2024 and 2025. Capital is directed to the network —capex of US$114.4 million in 2023, US$185.0 million in 2024, US$315.6 million in 2025, and US$285.0 million in the twelve months to June 2026— and to product development. Financing is rounded out with zero-coupon convertible notes, which lower current financing cost in exchange for potential dilution: as of June 30, 2026, US$1,293.3 million due 2026 and US$1,977.0 million due 2030 remained outstanding; by August 13, 2026 the 2026 notes had fallen to US$1,125 million through conversions of about US$169 million, and US$2,500 million due 2031 issued that day was added.

Who owns the shares — the alignment and whether there is a controlling shareholder.

• Founder control. Matthew Prince and Michelle Zatlyn together hold 52.4% of voting power along with the executive and director group, through class B shares carrying ten votes per share. There is ownership alignment but also the ability to decide without the rest of the capital. The chair role is not separated from the CEO role: Prince and Zatlyn are co-chairs, with Scott Sandell as lead independent director.
• Ownership commitment. Prince retains 7.28% of the capital and Zatlyn 2.58% per the proxy dated June 9, 2026: it is real ownership, not just options.
• Capital allocation. No dividend or buyback: the entire cash flow is reinvested in the network, compute capacity, and the developer platform. It is consistent with the stage, but it cannot yet be verified against a positive return on capital.
• Dilution. Diluted shares rose from 326.3 million in 2022 to 354.3 million as of the second quarter of 2026, close to 2% annually, and on top of that are the convertible notes with a conversion price of US$496.94.
• Corporate governance. On June 30, 2026 shareholders approved proposals 4A through 4F: creation of the non-voting class C, an increase in authorized class A and preferred shares, the class C split (which reconstitutes each class A or B share into one share of its class plus one non-voting class C share, taking shares outstanding from ~353.5 million to ~707 million), equal treatment across classes in dividends, fundamental transactions and liquidation, and approval of independent directors for class C issuances above US$100 million in acquisitions. The exchange of the series FF preferred shares, separately, did not require and was not put to a shareholder vote. The founders had sufficient votes to approve the package by themselves. The split was pending effectiveness as of August 13, 2026.

• It is not cheap: the price discounts a trajectory far above what a realistic five-year path can support
• The market is paying for the quality of the network and the acceleration in net retention, not for current cash flow: at this price, the base case's year-five maintenance cash flow yields less than 1% on the current market value
• Stock-based compensation is excluded from the non-GAAP metrics the company reports, and those are what set the market's reference price
• There are no missing buyers or motivated sellers to explain a discount
• Contracted growth, measured by current remaining performance obligations, is real and verifiable, and is the legitimate reason the market extrapolates

The gap between perception and reality here runs in the opposite direction from the usual case: the perception of the business is correct —the network is good, the growth is real, retention accelerated— and what is in question is the price paid for it. The source of the optimism is identifiable and honest: the company reports non-GAAP operating income of US$444 million for 2026 that excludes stock-based compensation equal to 20.2% of revenue. Measured with that compensation charged, the period's result is negative. With no identifiable source of discount, there is no analytical edge on the buy side.

The annual return (CAGR at 5 years) in each scenario, with the total period return below — the margin of safety made visual: upside range wide, downside range narrow.

Even in the bear scenario, the return holds at -48%/year (-96% total): the margin of safety protects the downside. The bull (-20%/year, -67% total) exceeds it comfortably — a favorable asymmetry, with a narrow downside range and a wide upside range.

• Absence of sustained profitability. Net losses of US$183.9 million in 2023, US$78.8 million in 2024, and US$102.3 million in 2025, with an accumulated deficit of US$1,204.9 million at year-end 2025.
• Public cloud competition. The annual report identifies competitors with stronger brands, larger customer bases, and the ability to sell equivalent products at zero or negative margin or to bundle them with the rest of their offering.
• Contract terms for large customers. Committed-fund contracts may include early termination rights more favorable to the customer and lower margins than the rest of the contracted base.
• Reputational exposure of the free tier. The company documents concrete episodes of public exposure over the content of paying and free customers and acknowledges adverse reactions both from keeping and from terminating those accounts.
• Potential dilution. Stock-based compensation equal to 20.2% of revenue plus convertible notes totaling US$5,625 million in face value across the three outstanding issuances.
• Voting concentration. The founders and the executive and director group together hold 52.4% of voting power and approved the new certificate of incorporation by themselves in June 2026.

Each thinker's analytical framework applied to our data.

• Buffett / Graham Quality + margin of safety

  Fails the quality gate: ROIC -48% does not clear the 10% bar.

• Peter Lynch Growth at a reasonable price (GARP)

  A hyper-growth, growing 25% — no conclusive multiple/growth to judge the price.

• Joel Greenblatt Cheap and high-return (Magic Formula)

  ROIC -48%; earnings yield not computable (EBIT or EV not positive).

• Howard Marks Perception vs reality + cycle

  The price discounts 150% vs our 25%: priced for perfection, no favorable mispricing.

• Seth Klarman Capital protection (bear scenario)

  Bear-scenario floor -48%/yr over 5y (material loss) → risk of permanent capital loss.

• Pat Dorsey Moat strength (Five Rules)

  A narrow moat, stable; sources: network effects, cost advantage, switching costs, efficient scale, intangibles → partially passes the Five Rules.

• Aswath Damodaran Expectations implied by the price

  The price demands 150% growth, far above our 25% — heroic assumptions.