NET is one of the pioneers of Software-Defined Networking, or SDN, which has served them incredibly well since its founding in 2009. The company started business as a CDN (Content Delivery Network), establishing PoPs (Points of Presence) around the globe to cache content closer to end users, so it can be delivered speedily when requested. By utilising SDN, they were able to decouple routing software from the underlying routers and switches, which gave them distinct competitive advantages as a CDN. This enables them to program their own networking algorithms, implement them on more affordable bare metal routers and switches, and gain a holistic view of their global network with centralised control.
Programmability and centralised control has empowered NET to optimise paths for specific traffic types, and using commodity, off-the-shelf hardware facilitated faster infrastructure expansion, leading to arguably the densest global network. Having a global programmable infrastructure allowed NET to expand into areas complimentary to CDN. The company was soon offering protection, reliability, and performance enhancements for websites. Then, they decided to also use their PoPs to serve as a programmable infrastructure platform for developers to build applications. This has spearheaded innovation in the serverless edge compute market.
In 2020, they entered the Zero Trust scene, and network security more broadly, opportunistically taking advantage of legacy network vendors having a tough time adapting to the new perimeterless paradigm of corporate networks. Despite being relatively new to network security, according earning calls commentary, NET are one of three vendors appearing on most orgs' shortlist for SASE (Secure Access Service Edge). The network density, infrastructure independence, and the global view of traffic, puts NET in an enviable position to capitalise on the growing convergence of security and networking.
All types of orgs can now use NET's dense programmable SDN of PoPs to build and protect highly performant applications, while also securing and accelerating their corporate network, extending from private DC to public clouds. In regards to quality and scope, NET is a truly unique company.
NET initially focused on growing its business with a bottom-up, freemium, and self-service model, that appealed to millions of techie enthusiasts and SMBs. More recently, they have expanded their high-touch sales presence, executing a top-down strategy to attract enterprises, offering them more complex solutions, which is proving to be highly successful.
The long-term outlook is really promising for NET. They've positioned themselves to take full advantage of secular digitalization tailwinds.
The Workers edge compute platform offers developers an attractive alternative to the hyperscalers - improving latency via closer proximities and lighter weight runtimes. And the plan is to increasingly compete with the hyperscalers for storage also.
Cloudflare One is the all-encompassing security and networking service, whereby orgs can use NET's global network as their own WAN, and receive first-class security as well. An ideal vendor for many orgs struggling with security and network performance in hybrid and perimeterless environments.
NET's unit economics are highly attractive, reflected in the c. 77% gross margin. The current ~50% growth - that has been sustained for numerous quarters at the time of writing - and the market opportunity ahead, has compelled management to keep spending elevated. However, when growth decelerates, the business model should be able to comfortably pivot toward attractive profitability and cash flows. In the meantime, as investors ourselves, we're looking for increasing market shares in key markets.
For institutional investors, on request, we can do tailored research or memos into any specific aspect of NET. For all types of investors, here are individual reports either solely focused on NET or including NET to some degree.
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Tailored research requests - price negotiable