Cloudflare Rises 7% in a Month: Should You Hold or Fold the Stock?

Cloudflare Inc. NET has gained 7.3% in the past month, outperforming the Zacks Internet – Software industry’s growth of 0.8%. This upward swing in the past month has raised questions for investors: Should they hold NET stock right now?

Cloudflare One Month Performance Chart

AI and Security Drive Cloudflare’s Growth

With Cloudflare doubling down on AI and expanding its Zero Trust security offerings, the company is well-positioned for strong long-term growth potential. NET’s Zero Trust platform, which protects businesses from cyber threats, is experiencing strong adoption.

As Cloudflare secured a three-year Secure Access Service Edge contract worth $4 million with a major U.S. investment firm in the fourth quarter of 2024, its position in the enterprise security space has been strengthened manifold.

In the AI space, NET’s Workers AI and AI Gateway platforms are gaining strong traction, making it a strong growth catalyst. These solutions enable businesses to optimize performance and security for their AI workloads.

Cloudflare’s management revealed that its AI offerings deliver up to 10 times price performance improvements over traditional hyperscalers. As AI adoption accelerates, NET’s multi-cloud and edge computing capabilities make it a critical infrastructure provider in this rapidly growing segment.

Strong Financials of NET

Cloudflare’s go-to-market strategy has improved its sales execution. The company experienced significant customer conversions in the fourth quarter, with 80% of new sales hires focused on enterprise clients. This strategic pivot is anticipated to drive larger deal wins in 2025.

Notable customer wins in the last reported quarter included a $20 million five-year contract with a Fortune 100 technology firm and a $13.5 million deal with a leading AI company, expanding its existing partnership. These high-profile deals highlight Cloudflare’s growing enterprise traction and validate its long-term expansion strategy.

Cloudflare’s profitability metrics also remain strong. In the fourth quarter, the company reported an operating income of $67.2 million, up 69% year over year, with the operating margin expanding 360 basis points to 14.6%. This reflects improved operational efficiency and disciplined cost management.

For 2025, NET forecasts non-GAAP earnings per share to be between 79 cents and 80 cents. The Zacks Consensus Estimate for Cloudflare’s 2025 earnings is pegged at 79 cents per share, indicating year-over-year growth of 5.33%.

NET Faces Intensifying Competition

The market for web infrastructure and security services in which Cloudflare primarily operates is growing highly competitive, where several well-established players like Akamai Technologies, Inc. AKAM, Fastly, Inc. FSLY and Amazon.com, Inc.’s AMZN Amazon Web Services are vying for market share.

For instance, Akamai Technologies offers a wide range of infrastructure and security services, including Akamai Content Delivery Network solutions, EdgeWorkers, EdgeKV and Global Traffic Management.

Fastly offers Compute@Edge, an image optimization solution and streaming delivery solutions. Besides these, Fastly has a strong security portfolio, including Next-Gen WAF, DDoS Mitigation and API security.

Amazon offers Amazon CloudFront, Amazon Web Services, Lambda@Edge and security solutions like Amazon WAF, API Gateway, and Bot Control. Furthermore, new entrants and niche players are constantly emerging, adding to the competitive pressure for Cloudflare.

Cloudflare is Overvalued at Present

Cloudflare is trading at a forward sales multiple of 18.39X compared with the Internet - Software industry’s valuation of 4.86X, indicating its overvaluation at present.

Cloudflare Forward 12-Months (P/S) Valuation Chart

Conclusion: Hold Cloudflare Stock for Now

While Cloudflare's growth prospects remain strong, its overvaluation at present poses a concern for investors. The company’s expanding enterprise client base, strong financial performance and AI-driven innovation position it for sustained growth.

For patient investors, holding Cloudflare stock is a prudent move. NET carries a Zacks Rank #3 (Hold) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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