Cloudflare Stock is Soaring as Agentic AI Proliferates | NET Stock Analysis

SUMMARY

Parkev Tatevosian, CFA, analyzes Cloudflare's recent financial performance and the impact of agentic AI on its business outlook. While the company demonstrates rapid revenue growth and improving profitability, concerns about its high valuation lead to a cautious investment stance.

MAIN POINTS

• Cloudflare reports that nonhuman traffic has surpassed human traffic on its networks due to the rise of agentic AI, driving strong revenue growth. [0:00]
• Revenue has increased tenfold since 2019, with management forecasting strong operating profit margins in the coming year despite recent negative margins. [1:00]
• Profitability metrics such as operating profit margin and returns on invested capital have improved dramatically but remain negative. [2:00]
• Cloudflare's valuation is at historically high levels, trading at a forward price-to-earnings ratio of 180, much higher than the S&P 500 average. [3:01]
• Comparisons are drawn to Palantir's earlier buying opportunity, but Cloudflare's current valuation already reflects its growth prospects. [4:00]
• Despite strong fundamentals and AI-driven demand, the stock is rated as a hold due to overvaluation and uncertainty about future growth acceleration. [5:00]

DETAILED ANALYSIS

Cloudflare has reached a significant milestone, with nonhuman, agentic AI-driven traffic now exceeding human activity on its networks. This surge is attributed to the rapid proliferation of AI agents performing tasks traditionally handled by people, which management believes could reach 1,000 times the volume of human traffic within five years. As a result, demand for Cloudflare's services has soared, reflected in its recent report of $696 million in revenue, a 36% year-over-year increase.

Over the past seven to eight years, the company has expanded its revenue tenfold, from around $200 million in 2019 to $2.5 billion over the trailing twelve months. Management projects that operating profit margins could reach 30% to 40% in the upcoming fiscal year, although the trailing twelve-month margin remains negative at 7.9%. This marks a substantial improvement from negative 45% in 2019, demonstrating effective cost control and operational scaling.

Similarly, returns on invested capital, while still negative at 4.2%, have improved markedly from negative 48% in 2019.

Despite these operational successes and the promising outlook driven by AI, Cloudflare's valuation has become a point of concern. The stock currently trades at a forward price-to-earnings ratio of 180, making it one of the most expensive in its history and about six times higher than the S&P 500 average. This elevated valuation suggests that the market has already priced in much of the anticipated growth, leaving little margin for upside surprises.

Comparisons are made to Palantir, which briefly presented an attractive entry point during a similar phase of accelerating growth, but Cloudflare's share price does not currently offer such an opportunity. Discounted cash flow analysis further supports the view that the intrinsic value is well below the current market price. Given these factors, the recommendation is to hold the stock, acknowledging the exceptional growth trajectory but also recognizing the risks associated with high valuation and the unpredictability of future AI-driven demand.

The conviction behind this hold rating is low, reflecting the inherent uncertainty in forecasting outcomes for a business experiencing unprecedented technological shifts.

LINKS

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