In the high-stakes world of cybersecurity, artificial intelligence (AI) is a double-edged sword. It can be a powerful ally, fueling real-time threat detection and data analysis, yet it also poses vulnerabilities that cybercriminals can exploit.
Within this landscape, Cloudflare, Inc. (NET), a prominent player in web infrastructure and website security, has emerged as a stealthy disruptor. Collaborating with tech giant Apple Inc. (AAPL) since 2020, starting with iCloud Private Relay, Cloudflare has been at the forefront of enhancing privacy and security for Apple users. Its latest venture involves encrypting AI queries for Apple’s Private Cloud Compute (PCC), aligning with Apple’s growing AI endeavors. Analysts, including Morgan Stanley’s Hamza Fodderwala, foresee a revenue boost for Cloudflare as Apple delves deeper into AI applications.
Cloudflare’s optimistic growth trajectory, coupled with its current stock position trading below its 52-week high, hints at an opportune moment for investors to delve into this cybersecurity gem.
The Force Behind Cloudflare Stock
Established in 2009, San Francisco-based Cloudflare, Inc. (NET) stands as a global leader in cloud services. Renowned for its array of cloud-based security solutions, Cloudflare shields everything from IoT devices to public cloud platforms with cutting-edge tools like web application firewalls and bot management.
Beyond security, Cloudflare bolsters website performance through offerings like content delivery network (CDN) and load balancing. Its innovative SASE platform, Cloudflare One, delivers a seamless network-as-a-service experience. Trusted by tech behemoths, financial institutions, and governmental bodies, Cloudflare continues to redefine digital security and performance, boasting a market cap of $26.6 billion.
Embracing AI as a force multiplier for its services, Cloudflare has centralized top-tier website protection to ensure robust security and operational efficiency. Leveraging NVIDIA Corporation’s (NVDA) hardware and AI algorithms in its data centers, Cloudflare has markedly elevated CDN and software performance, solidifying its position in the AI-powered tech domain.
Currently trading 32.8% below its 52-week high of $116, achieved on Feb. 9, Cloudflare’s shares have surged 21.8% over the past year.
From a valuation perspective, Cloudflare stock is priced at 20.35 times sales, below its five-year average of 33.20x.
Cloudflare’s Resilient Q1 and Promising Outlook
Cloudflare unveiled its Q1 earnings on May 2, showcasing its robust presence in the cybersecurity domain. Revenue saw a remarkable 30% year-over-year surge to $378.6 million, surpassing projections by 1.4%. This uptick was buoyed by strong client additions and increased adoption among major enterprises seeking next-gen security and zero-trust solutions. The company’s adjusted EPS stood at $0.16, exceeding estimates of $0.13.
Of particular note is Cloudflare’s impressive net dollar-based retention rate of 115%, underscoring high customer satisfaction and loyalty. With a record tally of 197,138 paying customers, marking a 17% annual rise, inclusive of 122 new high-revenue clients, Cloudflare’s operational mettle was further underscored by quarterly operating cash flow of $73.6 million (19% of revenue) and free cash flow of $35.6 million (9% of revenue).
Looking ahead to Q2, Cloudflare foresees a robust financial performance, projecting total revenue between $393.5 million and $394.5 million, with a non-GAAP EPS target of $0.14. For the long term, Cloudflare eyes fiscal 2024 revenue in the range of $1.648 billion and $1.652 billion, with a non-GAAP EPS projection between $0.60 and $0.61.
Analyst Projections for Cloudflare Stock
Amid Apple’s expansion into AI, Morgan Stanley analysts led by Hamza Fodderwala paint a rosy picture for Cloudflare. Apple’s unveiling of Private Cloud Compute (PCC), a proprietary AI processing system, alongside Apple Intelligence at WWDC24, showcases Cloudflare’s role in encrypting AI queries for PCC to bolster privacy and security. Analysts anticipate a single-digit percentage revenue uptick for Cloudflare from fiscal 2025 to 2027, boosted by Apple’s expanding AI endeavors. A revenue opportunity of $50 million to $100 million annually is posited as Apple intensifies chip usage and query handling.
Despite the promising outlook, Morgan Stanley remains cautiously confident, assigning an “Equal-weight” rating to NET stock. Their $92 price target suggests an 18% potential upside from the previous trading day’s close.
Overall, Cloudflare garners a consensus “Moderate Buy” rating. Among the 27 analysts monitoring the stock, eight advocate a “Strong Buy,” two lean towards a “Moderate Buy,” 13 opt for “Hold,” one advises “Moderate Sell,” while the remaining three tip “Strong Sell.”
The average price target for Cloudflare hovers at $90.08, hinting at a 15.5% upside from current levels. With a street-high target price of $135, the stock could potentially surge by up to 73.2% from its current position.