Cloudflare’s Act Three Boosted by AI Excitement, But Is It Too Late to Buy?
Cloudflare, a leading web services and cybersecurity company, has seen a surge in its stock price this year, driven by excitement surrounding its potential in the field of artificial intelligence (AI). Despite a recent downgrade in growth expectations for 2023, Cloudflare’s act three driven by AI has garnered investor attention. However, with the stock trading at a high premium, many are questioning whether it is too late to invest in this company.
In the second quarter of 2023, Cloudflare delivered solid financial results, surpassing its own revenue and adjusted net income guidance. CEO Matthew Prince even slightly increased the company’s full-year 2023 financial outlook. However, it is important to note that Cloudflare has experienced its fair share of challenges. After impressive growth since its initial public offering in 2019, the company shocked shareholders earlier this year when it revised its already modest growth guidance for 2023.
Despite these challenges, Cloudflare continues to win over new customers and has a promising future. However, the stock’s high valuation raises concerns. With a price-to-revenue ratio of nearly 18 times expected 2023 revenue and a projected sales expansion of around 30%, investors are expecting a significant acceleration in growth in the coming years. Additionally, Cloudflare’s free cash flow of $63 million over the past 12 months is not considered a meaningful gauge of valuation.
Cloudflare’s business initially revolved around content delivery networks (CDNs), which enable businesses to securely deliver data and apps to user devices. The company has since expanded into cybersecurity, competing with industry leaders like Palo Alto Networks and Zscaler. Its act three focuses on software developer services, particularly AI-powered applications.
One notable product in Cloudflare’s portfolio is the Cloudflare Workers developer platform, which includes the R2 Storage service for storing large amounts of unstructured data, essential for training AI algorithms. According to CEO Matthew Prince, R2 Storage has experienced significant growth, currently storing over 13 petabytes of customer data, an 85% increase quarter over quarter.
While investors are excited about Cloudflare’s potential in the AI space, it is still too early to determine its actual impact on the company’s growth trajectory. AI-related revenue may begin to contribute to growth in 2024, but its significance remains uncertain.
As a current shareholder, the author remains optimistic about Cloudflare’s prospects but is hesitant to buy more shares at the current valuation. For investors interested in a long-term position, a dollar-cost averaging plan may be a suitable approach, considering the stock’s volatility.
It is essential to approach the valuation of Cloudflare with caution, as the market’s expectations for future growth are based on an assumption of sustained expansion or an acceleration in the near future. Furthermore, Cloudflare is relatively young, and generating substantial cash flow has not been a priority until recently.
In conclusion, Cloudflare’s act three driven by AI holds promise for the company’s future growth. However, investors should be mindful of its current high valuation and the uncertainty regarding the actual impact of AI on its growth trajectory. While Cloudflare has a strong track record and significant potential, it is important to weigh the risks and potential rewards before making investment decisions.
