There’s nothing investors like more right now than a new cloud-software company. They got one on Friday with the public market debut of Cloudflare .
The San Francisco-based company, which provides security, content delivery, and other services to more than 20,000 web and internet businesses, priced an offering of 35 million shares at $15 apiece. In afternoon trading, the stock was changing hands at $18.05, a pop of about 20%.
After the offering, the company has 293.3 million shares outstanding, giving it a market capitalization of about $5.3 billion.
According to the initial public offering prospectus, Cloudflare had revenue of $129.2 million in the first six months of this year, up 48% from a year earlier, with a loss of $36.8 million. For 2018, the company posted revenue of $192.7 million, up 42%, with a loss of $87.1 million.
Cloudflare had raised $332.1 million in venture capital, according to Crunchbase. The largest institutional investors in the company after the offering include NEA, with an 18% stake; Pelion Venture Partners, with 16.5%; Venrock, with 14.2%; and Fidelity Investments, 4.9%.
Chairman and CEO Matthew Prince holds 12.9% of the stock, a stake worth close to $700 million. Note that the company opted for a dual-class share structure, with insiders holding supervoting Class B shares. Holders of Class B shares together control more than 96% of shareholder voting power.
In a letter to investors in the prospectus, Prince and COO Michelle Zatlyn say that since it was founded in 2010, the company has been intent on “helping to build a better Internet,” with “the suite of cloud services we anticipated customers would demand as they looked to replace their on-premise, hardware-based network appliances.”
They concede that their business is a little hard to explain simply.
“We provide security products like firewall and access management, performance products like intelligent routing, and reliability products like vendor-neutral load balancing—all as a service, without customers needing to install hardware or change their code,” they write. “We also have functions that play supporting roles to the products we sell. For example, we built one of the fastest, most reliable content delivery networks, not because we were targeting the CDN market, but because we knew caching was a necessary function in order to efficiently deliver our core products. We built the world’s fastest authoritative domain name services, not to sell DNS, but to deliver service levels we knew our customers needed.”
Cloudflare became the subject of widespread scrutiny earlier this summer for providing services to 8chan, a message-board site that became popular with violent extremists. In a blog post in August, Prince explained why the company removed 8chan from the Cloudflare platform, after first declining to do so.
“The rationale is simple: they have proven themselves to be lawless and that lawlessness has caused multiple tragic deaths,” he wrote. “Even if 8chan may not have violated the letter of the law in refusing to moderate their hate-filled community, they have created an environment that revels in violating its spirit.”
The company’s general approach is to “reluctantly tolerate content that we find reprehensible, but we draw the line at platforms that have demonstrated they directly inspire tragic events and are lawless by design,” he said. “8chan has crossed that line. It will therefore no longer be allowed to use our services.”
The company is often compared with Fastly (FSLY), a company about half the size that does position itself as a content delivery network, but with other services, such as security, layered on top.
Fastly went public in May at $16 a share.The stock has been trading wildly in recent weeks, no doubt influenced by new interest in the group as Cloudflare’s IPO neared. On Friday, it was down $2.46, or 8.2%, to $27.61, not a huge move for an extremely volatile stock.
Fastly trades for about 12 times projected 2019 revenue. If you assume the same rate of growth for Cloudflare in the second half of the year as it achieved in the first half, the company would report revenues of about $285 million, for a valuation of about 18 times estimated revenue.
Write to Eric J. Savitz at firstname.lastname@example.org