The cybersecurity industry has enjoyed secular growth over the past few years as companies and governments have been shoring up their defenses to ward off bad actors and prevent breaches. This explains why global cybersecurity spending has jumped from $34 billion in 2017 to $79 billion last year.
Annual cybersecurity spending is expected to jump once again in 2024, reaching $87 billion. More importantly, the cybersecurity market’s healthy growth is here to stay. The Insight Partners estimates the cybersecurity market could clock annual growth of 16% through the end of the decade, and that trend is likely to continue beyond 2030 thanks to emerging technology trends such as artificial intelligence, connected cars, and factory automation.
That’s why now would be a good time for investors to take a closer look at Cloudflare (NYSE: NET), a cybersecurity company that is growing at a nice pace and could help investors take advantage of the secular growth opportunity present in this space over the next decade.
Cloudflare’s latest results point toward solid adoption of its offerings
Content delivery network provider Cloudflare offers cloud-based security solutions to customers to help them connect securely to the internet, and also improve the reliability and quality of the connections. The company’s cloud-based security solutions can secure different types of cloud infrastructure ranging from public clouds to private clouds to on-premises cloud infrastructure and even Internet-of-Things devices.
The company is also looking to tap fast-growing cybersecurity niches such as zero-trust security and secure access service edge (SASE), and the good part is that its offerings are gaining healthy traction among customers. This is evident from the fact that Cloudflare’s revenue in the second quarter of 2024 increased 30% year over year to $401 million, exceeding the consensus estimate of $394 million.
What’s more, Cloudflare’s non-GAAP earnings doubled on a year-over-year basis to $0.20 per share, which was higher than the $0.14-per-share analyst estimate. The impressive year-over-year growth was driven by a fast-growing customer base. More specifically, Cloudflare finished the quarter with 210,000 paying customers, an increase of 21% from the same quarter last year.
Even better, Cloudflare saw a solid uptick in spending by its customers as well. The number of customers with annualized revenue of more than $100,000 increased almost 30% year over year to just over 3,000. The fact that Cloudflare gained a bigger share of customers’ wallets was evident from its dollar-based net retention rate of 112%.
As this metric compares the spending by the company’s customers in a quarter to the spending by those same customers in the same quarter last year, a reading of more than 100% means that its existing customers spent more money on its offerings. The robust growth in Cloudflare’s customer base and the higher customer spending explains why the company has slightly raised its full-year guidance to almost $1.66 billion from the earlier ballpark of $1.65 billion.
The updated guidance would translate into a year-over-year increase of 28% in revenue. Meanwhile, Cloudflare expects earnings to land between $0.70 and $0.71 per share in 2024, which would be a 44% increase at the midpoint from 2023 levels. Analysts are expecting Cloudflare’s healthy growth to continue over the next couple of years as well.
The company’s impressive growth seems sustainable
There is a good chance of Cloudflare being able to sustain impressive levels of growth for a long time to come as the company is expecting its total addressable market (TAM) to increase from $176 billion in 2024 to $222 billion in 2027. The company’s focus on consistently expanding its offerings in order to capture more cybersecurity niches is the reason why it expects its end-market opportunity to increase.
In all, it is easy to see why analysts are expecting Cloudflare’s earnings to increase at an annual rate of 62% for the next five years. The company’s sizable TAM means that it could deliver strong growth rates beyond the next five years as well and turn out to be a top growth pick for the next decade. That’s why now would be a good time to buy Cloudflare as its stock price has remained flat in 2024 so far, but its latest results have given it a shot in the arm and could spark a bull run.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Cloudflare. The Motley Fool has a disclosure policy.
1 Cybersecurity Stock You Can Buy and Hold for the Next Decade was originally published by The Motley Fool
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