Company Reports

We maintain our $87 fair value estimate for narrow-moat Cloudflare after the firm reported first-quarter results above our expectations while providing guidance that fits our model. We remain optimistic about Cloudflare’s long-term opportunity as it scales its business and penetrates more enterprise customers. While customers have slowed down additional spending, cybersecurity budgets have held up pretty nicely despite the tight macro, a trend we see continuing in the near term. As macro conditions improve, however, we expect Cloudflare to benefit from the upside as customers become more comfortable spending more on larger security vendors. The firm’s shares traded down sharply following the earnings report, likely due to guidance missing the market’s expectations. With this, we view current shares as slightly undervalued.

We are raising our fair value estimate for narrow-moat Cloudflare to $87 from $60 as a result of strong fourth-quarter results, the firm’s solid 2024 financial guidance, and an upward revision of our longer-term growth estimates due to Cloudflare’s increased penetration in the enterprise market. We believe that an improving macro will also benefit Cloudflare as customers increase their spending on cybersecurity after a slowdown in 2023. Lastly, we believe Cloudflare’s impressive enterprise penetration reflects positively on the personnel changes the firm made to its go-to-market organization earlier this year, a good omen for the future if its sales execution remains strong amid an improving demand landscape.

We believe Cloudflare is poised for success in both the security and edge computing spaces. As a security-focused content delivery network (CDN), Cloudflare stands to benefit from increased cybersecurity spend. Currently, more than 10% of global internet traffic goes through Cloudflare’s network, with more than one quarter of all websites in the world using Cloudflare. We expect cybersecurity to be increasingly relevant for firms across the globe as cyberattacks continue to increase. However, we think Cloudflare is capable of much more than security, and we view edge computing as a major opportunity for the firm.

We are maintaining our $60 fair value estimate for narrow-moat Cloudflare after the firm reported strong third-quarter results and guidance mostly in line with our expectations. Earlier this year, the company highlighted sales execution challenges that had hampered its financial results and guidance. Since then, we believe that it has rebounded, posting strong top-line growth and improved profitability against a tough macro backdrop while working to improve its sales personnel challenges. We view the shares as fairly valued, trading in 3-star territory.

We are maintaining our $60 fair value estimate for narrow-moat Cloudflare after the firm reported a strong quarter with results and guidance roughly in line with our above-consensus estimates. The quarter’s results represent a substantial turnaround especially when held in contrast against the last quarter when Cloudflare highlighted sales execution challenges hampering financials and guidance. We had previously noted our belief that these near-term personnel challenges would be resolved, and that their impact would dissipate over time. Once again, we reiterate our confidence in Cloudflare’s market opportunity that remains ahead of the firm, irrespective of quarter-to-quarter fluctuations caused by macroeconomic/idiosyncratic challenges.

We are maintaining our $60 fair value estimate for narrow-moat Cloudflare after the firm reported a mixed first quarter, with better-than-expected profitability offset by a weaker sales outlook for the remainder of the year. While we continue to have a positive view on Cloudflare’s overall business and management’s push to expand margins, we were surprised to hear of the sales execution challenges stemming from underperforming salespeople. We expect Cloudflare to resolve these personnel-related challenges in the coming quarters and anticipate these issues will dissipate over time. Although our view is not shared by many investors, we believe the market's selloff—Cloudflare’s share price dropped more than 20% after the earnings report—is overly punitive. We believe that long-term investors could benefit by purchasing the shares at a discount.

We are maintaining our $60 fair value estimate for narrow-moat Cloudflare after the firm checked off fiscal 2022 with a strong set of financial results, in line with our estimates. We continue to have a positive outlook on Cloudflare’s ability to penetrate upmarket (or enterprise) customers while expanding sales within its client base. Despite near-term macropressures affecting the firm’s net retention metric, we remain confident of the long-term viability of Cloudflare’s land-and-expand strategy. With shares up almost 10% after hours, we believe that the market has calibrated its valuation to reflect the firm’s strong fundamentals that we have reiterated in previous quarters. As a result, we view the firm’s shares as fairly valued.

We believe Cloudflare is poised for success in both the web security and edge computing spaces. As a security-focused content delivery network (CDN), Cloudflare stands to benefit from increased cybersecurity spend. Currently, more than 10% of global internet traffic goes through Cloudflare’s network, with more than one quarter of all websites in the world using Cloudflare. We expect cybersecurity to be increasingly relevant for firms across the globe as cyberattacks continue to increase. However, we think Cloudflare is capable of much more than security, and we view edge computing as a major opportunity for the firm.

We are lowering our fair value estimate for narrow-moat Cloudflare to $60 from $82 primarily due to trimming of our long-term forecasts, which, in retrospect, were too bullish. Part of our fair value revision is also informed by our belief that, in the near term, Cloudflare’s clients will rein in certain spending as they optimize costs in a challenging environment. Despite the near-term challenges, we reiterate our confidence in Cloudflare’s strong foothold in cybersecurity and the opportunity the firm stands to benefit from in the burgeoning edge computing space. While our fair value estimate is above Cloudflare’s stock price, which dipped more than 10% after earnings, we’d caution investors against investing in Cloudflare unless they’re willing to tolerate the macroeconomy-induced volatility expected in the coming quarters.

We believe Cloudflare is poised for success in both the web security and edge computing spaces. As a security-focused content delivery network (CDN), Cloudflare stands to benefit from increased cybersecurity spend. Currently, more than 10% of global internet traffic goes through Cloudflare’s network, with more than one quarter of all websites in the world using Cloudflare. We expect cybersecurity to be increasingly relevant for firms across the globe as cyberattacks continue to increase. However, we think Cloudflare is capable of much more than security, and we view edge computing as a major opportunity for the firm.

Narrow-moat Cloudflare reported a strong second quarter, with results above consensus expectations for both top and bottom line. We remain confident in Cloudflare’s strong foothold within the cybersecurity space and believe the firm has much to gain from growth in edge computing. We are also impressed by Cloudflare’s flexibility in adapting to the turbulent macro environment and view adjustments to the full-year outlook as appropriate. With this, we are maintaining our fair value estimate of $82 per share. Shares rose as much as 21% after hours, but we still view the stock as attractive.

We are lowering our fair value estimate for Cloudflare to $82 per share from $95 after the firm kicked off 2022 with bottom-line results below our expectations and management's expectation of a weaker bottom line thereafter (although the firm’s guidance for the top line remained strong). Our fair value change reflects a decrease in our near-term and long-term profitability outlook, with the firm’s planned operational spend outstripping our prior estimates. We don't foresee GAAP profitability for Cloudflare until 2026, a year later than our prior projection. Still, we think the market reaction is overdone. With shares down 14% on May 5 and down another 7% or so after market close, we see Cloudflare as attractive at current prices.

We believe Cloudflare is poised for success in both the web security and edge computing spaces. As a security-focused content delivery network (CDN), Cloudflare stands to benefit from increased cybersecurity spend. Currently, more than 10% of global internet traffic goes through Cloudflare’s network, with more than one quarter of all websites in the world using Cloudflare. We expect cybersecurity to be increasingly relevant for firms across the globe as cyberattacks continue to increase. However, we think Cloudflare is capable of much more than security, and we view edge computing as a major opportunity for the firm.

We are initiating coverage of Cloudflare with a fair value estimate of $95 per share, narrow economic moat rating, positive moat trend rating, and very high uncertainty rating. We currently view shares as overvalued.

We believe Cloudflare is poised for success in both the web security and edge computing spaces. As a security-focused content delivery network (CDN), Cloudflare stands to benefit from increased cybersecurity spend. Currently, more than 10% of global internet traffic goes through Cloudflare’s network, with more than one quarter of all websites in the world using Cloudflare. We expect cybersecurity to be increasingly relevant for firms across the globe as cyberattacks continue to increase. However, we think Cloudflare is capable of much more than security, and we view edge computing as a major opportunity for the firm.