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1 New Stock, 3 Portfolio Buys

June 16, 2024
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Wiko Steyn
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Wiko Steyn

Monthly Unicorn Portfolio Update

 

Cloudflare: Overvalued with a chance of Outperformance 

Tech is dead, innovation sucks, SaaS is not a sustainable business model and everything is going to zero. If those are the headlines you are seeing daily, it might be an indication that a potential bottom might be forming. Caveat: If there is still a period of capitulation ahead, we might be in for some more serious pain. Remember the market usually overreacts to the upside and downside. 

Cloudflare surged to a share price of $220 at the end of 2021 and an absolutely ridiculous P/S multiple of 120. We know the old saying, that you have to pay up for quality, but seriously these stocks were pushing the limits. It was a period of exuberance, entertained by free money and zero interest rates. This led to no price being too high and valuations were merely an old wives' tale. Fast forward to today and interest rates are souring, inflation is winning and we are on the cusp of WWIII.  Today, Cloudflare is a $54 stock with a measly P/S ratio of 22. If you are unfamiliar with the meaning of the Price to Sales ratio, you might not realise that we are being sarcastic and this stock is still nowhere near cheap with the company still sitting on a whopping 1,774 forward P/E ratio. 

Why are people still willing to pay these high valuations during these treacherous times? The company is operating in a sector with massive tailwinds, they have an excellent CEO and an ever-expanding TAM. Mission-critical software should also outperform during this, uhmmm, let's call it a recession-like period (since the US government does not want to admit they are in a recession). Unlike the marketing budget that gets cut at the first sign of trouble, cybersecurity and cloud infrastructure remain at the core of many enterprises. We believe Cloudfare has established itself as mission-critical software. 

Cloudflare offers a plethora of services to its customers and that might be what sets it apart in this fiercely competitive industry. Cloudflare's architecture gives you an integrated set of L3-L7 network services, all accessible from a single dashboard. It is designed to run every service on every server in every data center across their global network. 

We won't bore you with the details of each of their never-ending list of products in this article. Here is the quick version of their offering to enterprises large and small. 

  • A global immune system for your network. 
  • Compliance and privacy are built-in.
  • A faster connection thanks to their Content Delivery Network (CDN).
  • Serverless applications with exceptional performance, reliability and scale.


We are most excited by this expansive global network that Cloudflare has been building. As of right now, the company can reach nearly 95% of the world's population within approximately 50ms of latency, has data centers situated across 275 cities and 100 countries, has 11000 networks connected to it (including every major ISP and cloud provider), and has 155 Tbsp of global edge network capacity. This massive network infrastructure provides the company with a strong moat as well as opening doors to endless opportunities.

Cloudflare is by no means a bargain at these prices but it has the potential to be a great company in 5 years and it might be time to take a nibble.


 

Monthly Unicorn Portfolio Update

Ironically our more risky Unicorn Portfolio is outperforming our Core Fund, Safe Haven and ETF Portfolio during this drawdown. A couple of factors might be contributing to this relative outperformance. Firstly, these stocks are not found in your typical portfolio or in the S&P500 and therefore don't always correlate with the general market's moves. Most stocks in the Unicorn Portfolio also have small market caps, where individual company-related news can significantly dictate share price movements.  


In July we saw some frothiness in CRISPR stocks and we decided to reduce our position in Beam Therapeutiva and Intellia Therapeutics. That decision has paid off and the stocks have come down to a level where we are comfortable going back to a full allocation. We have also added to our recent purchase of Spotify.

 

Portfolio Transactions Summary

  • Buy $250 BEAM at $46.62
  • Buy $250 NTLA at $53.92
  • Buy $250 SPOT at $89.34
  • Buy $250 NET at $54.43




Disclosure

This is not financial advice and is only based on the author's opinion. This is not buy or sell recommendations of any stock.  The $10K is not real money and only a demonstration of a typical portfolio. The Unicorn Portfolio is a high-risk portfolio and should always remain a small allocation of your overall assets. This is an actively managed portfolio where we will buy and sell positions as we deem fit without any regard for taxation. Remember, all selling of stocks triggers a tax event in most countries and it is the investors personal responsibility to always remain tax compliant.


 


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