Cloudflare to Post Q1 Earnings: Time to Buy, Sell or Hold the Stock?

Cloudflare NET is scheduled to report first-quarter 2025 results on May 8, 2025.

Cloudflare anticipates revenues between $468 million and $469 million for first-quarter 2025. The Zacks Consensus Estimate for NET’s first-quarter revenues is pegged at $468.7 million, indicating year-over-year growth of 23.8%.

For the first quarter, the company expects non-GAAP earnings of 16 cents per share. The Zacks Consensus Estimate for NET’s first-quarter earnings is pegged at 16 cents per share, reflecting no change from the same quarter last year. The consensus mark for earnings has remained unchanged over the past 60 days. (Find the latest EPS estimates and surprises on Zacks Earnings Calendar.)

Cloudflare’s earnings beat the Zacks Consensus Estimate in each of the trailing four quarters, the average surprise being 20.7%.

Earnings Whispers for Cloudflare

Our proven model does not conclusively predict an earnings beat for Cloudflare this time. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat, which is not the case here. 

Though Cloudflare currently carries a Zacks Rank #3, it has an Earnings ESP of -1.54%. You can uncover the best stocks to buy or sell before they are reported with our Earnings ESP Filter. You can see the complete list of today’s Zacks #1 Rank stocks here.

Factors Likely to Influence Cloudflare’s Q1 Results

Cloudflare’s first-quarter performance is likely to have benefited from organizations transitioning from traditional firewall and VPN-based cybersecurity solutions to the zero-trust approach. The company’s performance is expected to have benefited from the growing hybrid working trend, which requires organizations to secure networks beyond on-premises.

The top line is expected to have gained from accelerated global expansion outside the United States. It is worth mentioning that the company generated approximately 50% of its 2024 revenues outside the United States.

A diversified clientele is likely to have boosted Cloudflare’s first-quarter top line. NET added around 16,174 new paying customers in the fourth quarter of 2024, bringing the total count to approximately 237,714.

The company also added 232 new large customers (annual billings of more than $100,000), taking the total count to 3,497 at the end of the fourth quarter. This rise in the customer base has prevailed for the past 14 quarters. This trend is expected to have continued in the to-be-reported quarter as well, backed by the increasing demand for NET’s cloud-based offerings amid the continuing digitalization trend.

However, amid the ongoing geopolitical and macroeconomic challenges, Cloudflare is facing difficulties in closing large deals in the pipeline, affecting its revenue recognition. These challenges stem from customer cautiousness in their IT spending and vendor onboarding due to recent policy measures of the United States. This is expected to have negatively impacted the company’s top-line growth in the to-be-reported quarter.

NET Price Performance & Stock Valuation

In the past year, shares of NET have surged 67.8%, underperforming the Zacks Internet - Software industry, Zacks Computer and Technology sector and the S&P 500 index’s growth of 22.7%, 8% and 10%, respectively.

NET One-Year Performance Chart

Now, let’s look at the value NET offers investors at the current levels. NET is trading at a premium with a forward 12-month P/S of 18.86X compared with the industry’s 5.12X, reflecting a stretched valuation.

Forward 12-Month P/S Valuation

Investment Consideration for Cloudflare

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.

However, Cloudflare is doubling down on AI and expanding its Zero Trust security offerings, enabling the company to position itself for strong long-term growth potential. NET’s Workers AI and AI Gateway platforms are gaining strong traction, making it a strong growth catalyst. As AI adoption accelerates, NET’s multi-cloud and edge computing capabilities make it a critical infrastructure provider in this rapidly growing segment.

Moreover, NET’s go-to-market strategy has improved its sales execution. The company has experienced significant customer conversions in the past few quarters, with a major portion of its sales efforts focused on enterprise clients. This strategic pivot is anticipated to drive larger deal wins in 2025.

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, making the stock worth holding at present.

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

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