In an April 2002 interview with Bloomberg Businessweek, Scott McNealy, then CEO of Sun Microsystems, reflected on investors paying 10x revenue for Sun stock at its dot-com peak ($64/share in 2000):<p>At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don't need any transparency. You don't need any footnotes. What were you thinking?<p>Now this analysis is imperfect... but it's good enough.<p>For reference Cloudflare trades at 39x revenue
"In the short term the market is a popularity contest; in the long term it is a weighing machine." - Warren Buffett<p>Here's the valuation though. Percentage of total web traffic going through Cloudflare.<p>- 2016 ~3.9%<p>- 2017 ~5.3%<p>- 2018 ~6.6%<p>- 2019 ~7.6%<p>- 2020 ~11.2%<p>- 2021 ~15.4%<p>- 2022 ~19.4%<p>- 2023 ~18.0%<p>- 2024 ~18.9%<p>- 2025 ~19.2%<p>- 2026 (early) ~20.9% (with later snapshots higher, up to the mid-to-high 20s)<p>Combine that with consistently excellent execution and popularity, you get the valuation.
The quote comes from Ben Graham and it goes "In the short run, the market is a voting machine, but in the long run, it is a weighing machine"<p>You're confusing market share with valuation. Also, look into business cycle theory from marathon asset management.<p>The four most dangerous words in finance "this time is different"
That analysis completely neglects growth.<p>Obviously you wouldn't pay 10x revenue if you expect revenue to be flat for the next 10 years.<p>No wonder that company no longer exists with a CEO that doesn't get that.
Cloudflare's growth is capped to 100% of internet traffic. it's already at 20%.
you're right on growth being excluded, which is why I said the analysis is imperfect.
A tech stock paying dividends? It'll never happen.