What Happened?
Shares of internet security and content delivery network Cloudflare (NYSE: NET) jumped 6.1% in the pre-market session after the stock received a double upgrade (Sell to Buy) from Bank of America, indicating that the firm's analysts saw a brighter road ahead. Bank of America analysts led by Madeline Brooks highlighted Cloudflare's unique positioning in the artificial intelligence space, stating, "The company offers a differentiated approach to AI, and we place a high probability on Cloudflare becoming the leader in AI-as-a-Service (AIaaS), which we expect will emerge as the preferred method of AI consumption for enterprises."
We can think of AIaaS like Netflix for AI. Companies don't need to build the whole thing themselves, they just subscribe to what they need and plug it into their apps and systems. Simply put, no need to break the bank on expensive infrastructure or hire a team of PhDs. Platforms like Cloudflare would handle all that, and if they pull that off, there could be real upside.
Also, the analysts highlighted NET's growing market share in the Secure Access Service Edge (SASE) segment. They noted that NET had reached 33% market penetration, and more than half of new spending would be captured by the company.
After the initial pop the shares cooled down to $127.27, up 2.6% from previous close.
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What The Market Is Telling Us
Cloudflare’s shares are quite volatile and have had 17 moves greater than 5% over the last year. In that context, today’s move indicates the market considers this news meaningful but not something that would fundamentally change its perception of the business.
The biggest move we wrote about over the last year was about 2 months ago when the stock gained 20.1% on the news that the company reported impressive fourth-quarter results, which exceeded analysts' billings expectations. Revenue also beat, with 28% year-on-year growth accelerating from 27% last quarter, something that the market tends to reward.
The top line benefited from strong wins in the enterprise segment as the number of large customers kept pace with the sales growth while the large customer count (1m+ customers) grew even faster at 47% y/y. This raised the total enterprise revenue mix to 69%, up from 66% in the same period last year. Cloudflare's AI business also lived up to the hype, driving strong adoption of its Workers platform, as the company won several large enterprise AI deals during the quarter.
It wasn't just top line, either, with operating profit beating handily. Lastly, we were happy with full-year revenue guidance, which exceeded expectations. Overall, this was a very good quarter.
Cloudflare is up 13.1% since the beginning of the year, but at $127.27 per share, it is still trading 27.9% below its 52-week high of $176.50 from February 2025. Investors who bought $1,000 worth of Cloudflare’s shares 5 years ago would now be looking at an investment worth $5,876.
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