NET — Growth and cash conversion

Cloudflare's growth is accelerating. The more interesting question is how much of it will turn into durable profit.

On November 5, $NET reported third-quarter revenue of $782.5 million, up 39% from a year earlier. Its chief executive called that the company's fastest revenue growth in nearly four years. The shares were up 12.52% at 11:01 a.m. Eastern the following day, though that intraday move could change.

The earnings report contains two different margin stories. Adjusted operating margin rose to 17.5% from 15.3%, but the operating loss under generally accepted accounting rules widened to $67.9 million from $37.5 million. Adjusted results exclude costs including stock-based compensation, which still matters to shareholders.

Cash conversion deserves a closer look too. Free cash flow rose to $82.1 million, but fell to 10% of revenue from 13% a year earlier. Network investment can support growth, yet it also uses cash today.

For the next test, compare revenue growth with gross margin, stock compensation and free cash flow in the fourth-quarter report. Growth alongside improving cash conversion would tell a stronger story than revenue alone.