Cloudflare's stock has continued its impressive rally, now trading 98% above its lowest point this year. The surge reflects growing demand for its services, particularly as businesses adapt to the rise of AI agents. Shares recently traded at $314, approaching their all-time high.
AI agent boom drives Cloudflare's growth
Cloudflare has emerged as a key beneficiary of the AI boom, as companies increasingly rely on its tools to verify human traffic and manage machine-to-machine interactions. The company's CEO highlighted this shift, noting that the internet is being rewritten for AI-driven commerce and answer engines, with Cloudflare positioned at the center of this transformation.
The latest earnings report underscores this momentum. Revenue jumped 36% year-over-year to $696 million, beating analyst expectations. Gross profit reached $499 million, representing a 71.8% margin. However, the company posted a net loss of $169 million, largely due to $150 million in restructuring charges. On a non-GAAP basis, which excludes those charges and stock-based compensation, net income was positive at $107 million.
Analysts see more upside, but valuation is stretched
Wall Street remains optimistic about Cloudflare's growth trajectory. Analysts project third-quarter revenue to rise 31% to over $738 million, with fourth-quarter revenue expected to grow 30% to $798 million. That would bring full-year revenue to over $2.8 billion, followed by $3.7 billion next year.
Several firms have raised their price targets. Citigroup upgraded the stock to Overweight, while Scotiabank lifted its target from $300 to $390. Morgan Stanley and Wells Fargo both set targets at $370. These analysts cite robust revenue growth, strong market share in the CDN space, and AI tailwinds as key drivers.
However, valuation remains a significant risk. Using a Rule-of-40 metric—combining revenue growth of 33% with a negative net income margin of 8%—Cloudflare scores only 25%, well below the 40% threshold often favored by investors. This suggests the stock may be priced for perfection.
Technical outlook points higher
From a technical perspective, Cloudflare's chart is bullish. The stock has formed an ascending channel and is approaching its all-time high of $331. It remains above the 50-day exponential moving average, and the Relative Strength Index has turned upward, crossing above the neutral 50 level. The path of least resistance appears to be upward, with an initial target at $331. A breakout above that could open the door to the $400 psychological level.
Investors should weigh the strong growth narrative against the stretched valuation. While the AI-driven demand story is compelling, the stock's current price may already reflect much of the optimism. For context, other tech names like AMD's recent bullish flag pattern and Nvidia's rebound show similar dynamics in the AI sector.
As always, investors should conduct their own research and consider their risk tolerance before making decisions.
This article is for informational purposes only and does not constitute financial advice.
