In the high-stakes world of cybersecurity, artificial intelligence (AI) is both a powerful ally and a potential vulnerability. It can analyze vast data, detect patterns, and counter cyber threats in real-time, yet cybercriminals can also exploit it.
In this environment, Cloudflare, Inc. (NET), the web infrastructure and website security company, has been quietly making waves. Since partnering with the iPhone maker Apple Inc. (AAPL) in 2020, starting with iCloud Private Relay, Cloudflare has enhanced privacy and security for Apple users. Now, it’s set to play a key role in Apple’s new Private Cloud Compute (PCC) by encrypting AI queries. As Apple’s AI usage grows, Morgan Stanley (MS) analyst Hamza Fodderwala predicts a boost to Cloudflare’s top line.
With Cloudflare's bright growth prospects and its current trading position well below its 52-week high, now could be a prime time to consider adding this stock to your portfolio.
About Cloudflare Stock
Founded in 2009, San Francisco-based Cloudflare, Inc. (NET) is a global powerhouse in cloud services. Known for its suite of cloud-based security solutions, Cloudflare protects everything from public cloud platforms to IoT devices with web application firewalls and bot management.
Beyond security, it enhances website performance with tools like content delivery network (CDN) and load balancing. Its innovative SASE platform, Cloudflare One, offers a seamless network-as-a-service experience. Trusted by tech giants, financial institutions, and governments, Cloudflare continues to redefine digital security and performance, boasting a market cap of $26.6 billion.
Cloudflare has embraced AI to supercharge its services. By centralizing top-notch protection for hosted websites, it ensures robust security and efficiency. Its data centers now power generative AI programs, leveraging NVIDIA Corporation’s (NVDA) hardware and AI algorithms. This move enhances CDN and software performance, making Cloudflare a standout in the AI-driven tech landscape.
Cloudflare is currently trading 32.8% below its 52-week high of $116, set on Feb. 9. Despite the double-digit dip, shares of Cloudflare have rallied 21.8% over the past 52 weeks.
In terms of valuation, Cloudflare stock trades at 20.35 times sales, lower than its own five-year average of 33.20x.
Cloudflare’s Strong Q1 and Optimistic Outlook
Cloudflare reported its Q1 earnings results on May 2, underscoring its strong momentum in the cybersecurity space. Revenue surged 30% year over year to $378.6 million, outpacing forecasts by 1.4%, driven by robust client acquisitions and expanding adoption among major enterprises seeking enhanced security and zero-trust solutions. The company reported adjusted EPS of $0.16, surpassing estimates of $0.13.
Notably, Cloudflare's net dollar-based retention rate hit 115%, showcasing strong customer satisfaction and loyalty. With a record-high 197,138 paying customers, up 17% year over year, including 122 new high-revenue customers, Cloudflare's solid operational metrics were further highlighted by operating cash flow of $73.6 million (19% of revenue) and free cash flow of $35.6 million (9% of revenue) for the quarter.
Cloudflare anticipates a strong financial performance in the current Q2, projecting total revenue to range between $393.5 million and $394.5 million, with non-GAAP EPS targeted at $0.14. In the longer term, Cloudflare forecasts fiscal 2024 revenue to be between $1.648 billion and $1.652 billion, with non-GAAP EPS projected to be between $0.60 and $0.61.
What Do Analysts Expect for Cloudflare Stock?
Morgan Stanley analysts, led by Hamza Fodderwala, predict a promising future for Cloudflare, especially with Apple’s AI expansion. At WWDC24, Apple introduced Private Cloud Compute (PCC), a private AI processing system, alongside Apple Intelligence. The analysts believeCloudflare has a key role in encrypting AI queries for PCC, which is crucial for enhancing privacy and security. In particular, they speculate Cloudflare's OHTTP relay is pivotal, citing its partnership with iCloud Private Relay.
As a result, Morgan Stanley expects Cloudflare could see a low to mid-single-digit percentage boost to top-line growth from fiscal 2025 to fiscal 2027, bolstered by Apple's expanding AI footprint. They project an annual revenue opportunity of $50 million to $100 million as Apple adopts more chips and handles more queries.
Despite these promising prospects, Morgan Stanley remains cautiously optimistic with an "Equal-weight" rating on NET stock. Their $92 price target suggests a potential upside of 18%, to Friday’s closing price.
Cloudflare has a consensus “Moderate Buy” rating overall. Of the 27 analysts covering the stock, eight advise a “Strong Buy,” two give a “Moderate Buy,” 13 play it safe with a “Hold,” one suggests a “Moderate Sell,” and the remaining three recommend a “Strong Sell.”
The mean price target for Cloudflare stock is $90.08, suggesting an upside potential of 15.5% from the current price levels. The Street-high target price of $135 implies that NET could rally as much as 73.2% from here.
On the date of publication, Sristi Suman Jayaswal did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
