Cloudflare NET shares have gained 22.1% in the past six months, outperforming the Zacks Computer Technology sector, Zacks Internet Software industry and the S&P 500’s return of 8%, 10.6% and 10.3%, respectively. The outperformance reflects investors’ confidence in Cloudflare’s product enhancements with artificial intelligence (AI) capabilities and the potential positive impact on NET’s top line.
For instance, the company recently upgraded its serverless AI platform, namely Workers AI, with enhanced graphics processing capabilities. Before this, NET launched security products, including AI Audit, Firewall for AI and Defensive AI to further its position as an AI-oriented security provider. The company has also partnered with industry leaders to enhance its AI capabilities.
NET Grows in AI Space Through Partnerships
Cloudflare has expanded in the AI space through collaborations with Hugging Face Hub, CrowdStrike CRWD, Microsoft MSFT and NVIDIA NVDA. Cloudflare’s collaboration with Hugging Face empowered developers with the capability to deploy AI applications on NET’s global network with just one click from Hugging Face.
Cloudflare’s partnership with CrowdStrike combined NET’s Zero Trust protection and CRWD’s AI-powered cybersecurity to prevent breaches on a large scale. Cloudflare has also partnered with many other industry leaders in 2024 to expand its capabilities beyond AI.
NET’s partnership with Microsoft was focused on enabling enterprise customers to deploy AI models across devices, network edges and cloud environments by leveraging ONNX runtime. In 2023, Cloudflare also announced its plan to use NVDA’s GPUs and Ethernet switches in its global network to bring AI close to its users.
These product introductions and enhancements, along with partnerships with industry leaders, are likely to positively impact NET’s revenues. Cloudflare expects its 2024 revenues in the band of $1.661-$1.662 billion. The Zacks Consensus Estimate for the same is pegged at $1.66 billion, indicating year-over-year growth of 28%.
Cloudflare expects its non-GAAP earnings per share for 2024 to be 74 cents. The Zacks Consensus Estimate for the same is pegged at 74 cents, suggesting year-over-year growth of 51%.
Cloudflare 6 Month Performance
Image Source: Zacks Investment Research
Cloudflare Faces Competitive Headwinds
NET operates in a highly competitive market that contains several large and established on-premises, appliance-based solutions and cloud-based services providers. Industry leaders like Palo Alto, Check Point, F5 and Fortinet, with their large infrastructure, escalate competitive challenges for Cloudflare.
The cybersecurity market has several new entrants seeking opportunities for capitalizing on the growing demand for security solutions driven by the rapidly growing IT space. To survive in the highly competitive cyber security market, each player must continually invest in broadening its capabilities.
Over the past few years, Cloudflare has invested heavily to enhance its sales and marketing capabilities, particularly by increasing its international presence. This has affected its operating margins.
What Should Investors Do?
Cloudflare’s strong market position and expansion in the AI market are encouraging. However, the stock’s high valuation warrants caution. The stock has a Zacks Value Style Score of F, suggesting a stretched valuation.
Considering all these factors, we suggest investors to retain this Zacks Rank #3 (Hold) stock at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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