AI And Multi Cloud Adoption Will Drive Powerful Long Term Upside Potential

Catalysts

About Cloudflare

Cloudflare operates a global cloud network that secures, accelerates and runs applications and AI workloads at the edge for organizations of all sizes.

What are the underlying business or industry changes driving this perspective?

• Rapid adoption of AI inference and agentic workloads on Workers and Workers AI, enabled by Cloudflare’s globally distributed, high utilization network, can drive outsized developer platform revenue growth and a rising mix of large, long duration contracts that expand RPO and overall revenue.
• A structural shift toward multi-cloud, lower egress costs and network neutral architectures positions Cloudflare as the connective fabric across clouds, supporting higher attach of R2, application services and SASE, which should lift dollar-based net retention and expand gross profit dollars over time.
• Emerging AI driven business models for media, commerce and payments, including products like Pay Per Crawl and NET Dollar, create new transactional revenue streams on top of existing traffic, offering incremental upside to revenue and earnings without proportional OpEx growth.
• Acceleration of Zero Trust and SASE consolidation, as enterprises replace legacy VPNs and point solutions with Cloudflare’s unified platform, supports premium pricing, higher gross margins and improving operating margin as sales productivity and partner led deals continue to scale.
• Growing penetration among AI native companies and large enterprises, combined with an expanding pool of funds contracts across more than 55 products, increases platform stickiness and cross sell potential, supporting sustained high 20s to low 30s revenue growth and improving free cash flow conversion.

Assumptions

This narrative explores a more optimistic perspective on Cloudflare compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Cloudflare's revenue will grow by 31.5% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -5.1% today to 3.7% in 3 years time.
• The bullish analysts expect earnings to reach $170.3 million (and earnings per share of $0.48) by about December 2028, up from $-103.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $-204.0 million.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 888.2x on those 2028 earnings, up from -688.2x today. This future PE is greater than the current PE for the US IT industry at 29.9x.
• The bullish analysts expect the number of shares outstanding to grow by 1.51% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.09%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The rapid shift toward AI driven and agentic Internet business models may take longer than expected to standardize or monetize, leaving products like Workers AI, Pay Per Crawl and NET Dollar underutilized for an extended period, which would slow revenue growth and reduce operating leverage, ultimately pressuring earnings growth over time.
• Cloudflare is positioning itself as a neutral multi cloud fabric and AI gatekeeper at the network edge, but entrenched hyperscalers that control underlying compute and data, as well as emerging AI native platforms, could bundle competing capabilities and compress pricing power, which would weigh on long term revenue growth and gross margins.
• The strategy depends heavily on scaling large enterprise and government deals through partners, including SASE and Zero Trust consolidation. If channel led sales or partner relationships stall in a weaker macro or more competitive environment, large deal flow and pool of funds consumption could slow, which would dampen RPO expansion and revenue growth.
• Cloudflare is investing aggressively in network capacity and GPUs using an approach that drives very high utilization. If AI inference demand or usage patterns prove more volatile than expected, the company risks overdeployment or suboptimal utilization that could lift network CapEx as a proportion of revenue and put structural pressure on gross margins and free cash flow.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Cloudflare is $318.0, which represents up to two standard deviations above the consensus price target of $242.21. This valuation is based on what can be assumed as the expectations of Cloudflare's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $318.0, and the most bearish reporting a price target of just $117.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be $4.6 billion, earnings will come to $170.3 million, and it would be trading on a PE ratio of 888.2x, assuming you use a discount rate of 9.1%.
  
• Given the current share price of $202.44, the analyst price target of $318.0 is 36.3% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.