Business condition attached to the margin of safety
At least two consecutive years in which operating cash flow, after removing working-capital swings, stock-based compensation and maintenance capital spending, is positive (FY2021-FY2025 ran from -$0.42 to -$0.65 per share).
Cloudflare sells a global network that sits between businesses and the internet: security (DDoS protection, web application firewall, Zero Trust access), performance and delivery, and developer and AI-inference services (Workers). Revenue grew from $431 million in 2020 to $2,168 million in 2025, and at year-end 2025 contracts already signed but not yet recognised as revenue totalled $2,496 million, about 63% of it due within twelve months. The company is growing quickly and the customer base is sticky. Our question is different: how much cash does that revenue leave for shareholders once the real costs of running the business are counted? How we measure earnings. We start with operating cash flow ($603 million in 2025), remove the swings from working capital (mostly customers paying annual contracts in advance, which is timing rather than earnings), deduct stock-based compensation in full ($451 million, or about 21% of revenue, because paying staff in shares is a real cost to owners), and deduct only the capital spending needed to stay in place. Total capital spending was $343 million in 2025 (data-centre and network equipment plus capitalised software); we treated roughly $78 million of that as growth spending in line with the company's long-run spending-to-revenue ratio, leaving about $264 million as maintenance. One judgement matters: sales commissions that are capitalised and then amortised, and lease payments, were left inside operating cash flow rather than stripped out as working capital, because the matching non-cash amortisation and lease-cost add-backs would otherwise flatter the result. Stripping every working-capital line instead would give roughly -$15 million for 2025, which is still negative. The result is negative in every year. Owner earnings per share were about -$0.41 (2020), -$0.58 (2021), -$0.65 (2022), -$0.42 (2023), -$0.52 (2024) and -$0.65 (2025). We anchor on 2021 to 2025, the years since the company reached scale, which gives a median of about -$0.58 per share. Relative to revenue the loss narrowed from about 27% in 2021 to about 10.5% in 2023 and has been flat since. Operating cash flow more than doubled between 2023 and 2025, but stock compensation and equipment spending rose almost as fast. The company itself reports operating losses under accounting rules in each of the last three years (net loss of $102 million in 2025). Cases. Each case includes only what the filings show is already secured or a proven, repeatable process. Signed contracts and a long record of revenue growth are real, but growth in revenue does not by itself create owner earnings when each year's revenue costs more in stock compensation and equipment than it returns in cash. Every route to positive owner earnings, namely lower stock compensation as a share of revenue, higher margins, or the new AI and developer products maturing, depends on something that has not yet happened, so it is left out. Weighing revenue growth against those costs, we credit no value in any case. - Bear: revenue growth slows, stock compensation and network spending stay at recent levels, and the earnings stream stays negative. Worth $0 per share. The company does not owe more than it is worth: it held about $943 million of cash and $3,158 million of securities at year-end 2025 against convertible notes that include $2.0 billion due 2030. - Base: recent cost ratios persist, with no evidenced improvement. Worth $0 per share. - Bull: the company's identified levers execute, with the signed backlog converting on schedule and spending growth slowing, but nothing in the record shows stock compensation or capital intensity falling, so the stream remains at or below zero. Worth $0 per share. What this does and does not say. A value of zero on this measure is not a claim that the business is failing. It means that, on the cash the business demonstrably leaves to owners after paying its staff in shares and maintaining its network, we can point to no value that is in the bag. The approximately $4.1 billion of cash and securities is real, but the interest it earns is already in operating cash flow, so it is not counted a second time. These estimates would be wrong if stock compensation falls sharply relative to revenue, or if capital spending per dollar of revenue drops meaningfully while growth continues; two or three consecutive years of positive owner earnings would change this view. No margin-of-safety price is set until that happens. Could not be fully reconciled: 2018 and 2019 figures were not used because the company was pre-IPO or in its IPO year and per-share figures were not comparable.