Stock Wars: Cloudflare Vs. Datto

Benzinga’s weekly Stock Wars matches up two leaders in a major industry sector with the goal of determining which company is the better investment.

This week, the duel is between two cybersecurity software providers: Cloudflare Inc. NET and Datto Holding CorpMSP.

The Case For Cloudflare: This San Francisco-based company has its roots in Project Honey Pot, an open-source endeavor created in 2004 by Matthew Prince and Lee Holloway to track how spammers culled email addresses. In 2009, they were joined by Michelle Zatlyn and shifted their focus from tracking Internet-borne threats to stopping them.

Over the years, the company grew by acquiring multiple firms — Vetrix and Area 1 Security last month and Zaraz in December — and by mitigating a series of mega-distributed denial of service (DDoS) attacks that generated positive media coverage for the company. Cloudflare opened for public trading in September 2019.

Among its recent corporate developments, Cloudflare announced it was not following other U.S. companies out of Russia but would continue to provide some services because “Russia needs more Internet access, not less.” Earlier this month, the company said it was integrating its Zero Trust platform with the Falcon Zero Trust Assessment from CrowdStrike Holdings, Inc. CRWD, and it was entering a partnership CrowdStrike and Ping Identity Holding Corp PING in creating the Critical Infrastructure Defense Project to provide free cybersecurity services to industries that are vulnerable to cyber threats.

In its most recent quarterly earnings report, the fourth-quarter data published on Feb. 10, Cloudfare recorded $193.5 million in revenue, up from $125.9 million one year earlier, but it also saw a net loss of $77.5 million compared to a net loss of $34 million one year earlier. Cloudflare’s net loss per share, both basic and diluted, was -24 cents, compared with -11 cents in the fourth quarter of 2020.

Prince, who is also the CEO of Cloudflare, ignored the fourth-quarter data and focused on the full year’s results, with “a 52% year-over-year increase in revenue growth and a 71% year-over-year increase in large customer growth. It was also the fifth straight year we achieved 50%, or greater, compounded growth.”

Cloudflare shares opened for trading on Wednesday at $114.86; the 52-week trading range is $63.25 to $221.64.

See Also: The complete Stock Wars series

The Case For Datto: This Norwalk, Connecticut-based company was founded by software programmer Austin McChord in 2007, who initially made his mark by building and selling handmade data backup devices. Within six years, Datto had a somewhat more sophisticated operation and raised $25 million in its first round of venture capital financing. More funding helped finance several acquisitions that helped grow the company, and in late 2017 Datto was acquired by Vista Equity Partners for $1.5 billion, which merged the company with its portfolio holding Autotask Corporation. Datto has been publicly-traded since October 2020.

Among its recent corporate developments, Datto acquired the cybersecurity company Infocyte in January, released a tool for the Managed Services Provider (MSP) community last December to combat Apache Log4j vulnerability and unveiled SaaS Defense, its advanced cyber-threat protection product created for MSPs.

In its most recent earnings report, the fourth-quarter data published on Feb. 23, Datto reported revenue of $164.3 million, up from $139 million one year earlier, and net income of $5.7 million compared to the $7.2 million net loss from the same period in the previous year. Datto’s basic earnings per share were 4 cents, whereas it had a net loss per share of -5 cents in the fourth quarter of 2021.

“The fourth quarter capped an exceptional year for Datto and our MSP partners,” said Tim Weller, Datto’s CEO. “We exceeded all of our targets in our first full year as a public company and launched several new, highly differentiated products that help our MSP partners better secure digital assets on behalf of their SMB clients … 2022 is shaping up to be another exciting year for Datto as we continue to help our MSP partners on their security journey with our new products ramping and more on the way.”

Datto’s shares opened for trading on Wednesday at $25.66, sandwiched between its 52-week range of $20.76 and $28.26.

The Verdict: Cybersecurity is always a hot topic, and the threat of a new wave of Russian-hosted cyberattacks has given the issue more attention. But Cloudflare’s decision to continue operations in Russia makes it stand out from other U.S. tech firms — and not in a good way.

In its fourth-quarter earnings call, CEO Prince insisted Cloudfare was “not in a rush to be significantly profitable” and was not disturbed by some red ink.

“We know this is a business that can generate significant cash flows when we want,” he said. “In the short term, we expect we'll see negative cash flows in the next two quarters as we invest in our network and redesign our physical offices for a post-COVID world. But by the second half of the year, we forecast we'd be free cash flow positive.

“We admire and seek to emulate other companies that came before us and had significant cash flows while holding operating margins at breakeven, and we feel very dialed in and confident in our business as we come out of the uncertainty of the last two years.”

Uh-huh. Now, compare that to what Datto CFO John Abbot said in his company’s fourth-quarter earnings call.

“Our fourth-quarter results reflect strength across all geographies and across our full suite of products and another quarter of accelerating revenue growth,” Abbot said. “Fourth-quarter recurring subscription revenue of $153.2 million grew 19% over Q4 last year, both as reported and on a constant-currency basis. Subscription revenue comprised 93% of our total revenue, which came in at $164.3 million in the quarter, representing 18% year-over-year growth, again, as reported and on a constant-currency basis.

“Strong operating results drove the outperformance relative to our guidance, with currency providing around 25 basis points of benefit, which was less of a tailwind than in prior quarters and less than we had forecasted,” he added.

While Cloudflare is a company to be admired — or was, prior to its actions in Russia — the Datto team seems more focused on generating a profitable 2022. Based on the embrace of Putin and the pursuit of profits, this Stock Wars duel goes to Datto.

Photo: Tumisu / Pixabay