Cloudflare stock analysis: bullish outlook, but key valuation risk remains

Cloudflare's stock has kept up its strong rally as demand for its services grows, buoyed by the ongoing AI agent boom. That momentum suggests the rally still has room to run. Shares were trading at $314, up 98% from their low for the year.

Cloudflare’s service is benefiting from the AI agent boom

Cloudflare, a top software company, has become one of the top beneficiaries of the ongoing artificial intelligence boom. That’s because the ongoing AI agent growth has pushed more companies to embrace its tool to verify humans. In a statement, the company’s CEO said:

“As the web shifts to AI answer engines and agent-driven commerce, we are seeing a fundamental rewrite of the Internet for machine-to-machine traffic. Cloudflare sits at the center of this paradigm shift.”

The most recent results showed just how fast Cloudflare’s business is growing. Its revenue soared by 36% to $696 million, higher than what analysts were expecting. 

Cloudflare’s gross profit margin jumped to $499 million, equivalent to 71.8% of the total revenue. The challenge, however, is that the company made a $169 million loss last quarter, driven by a $150 million surge in restructuring charges. Its non-GAAP net income, which strips out these charges and stock-based compensation, was positive $107 million. 

Cloudflare’s growth to continue

Analysts are optimistic that the company has more room for growth as more companies and governments embrace its platform. The average estimate among analysts is that its revenue will grow by 31% in the third quarter to over $738 million. 

Its fourth quarter revenue is expected to jump by 30% to $798 million, bringing the annual figure to over $2.8 billion. These are strong numbers for a company that was started in 2009. It will then jump to $3.7 billion next year. 

These numbers explain why analysts remain optimistic about the company. Citigroup hiked its target to outperform, while Scotiabank boosted the target from $300 to $390. Morgan Stanley hiked the target to $370, while Wells Fargo boosted it to $370. 

Analysts cite the company’s revenue growth, strong market share in the CDN industry and the artificial intelligence tailwinds.

The challenge, however, is that the company has become highly overvalued. By adding its revenue growth of 33% and the net income margin of minus 8%, the company has a Rule-of-40 metric of 25%. 

Cloudflare stock price technical analysis

Cloudflare stock chart | Source: TradingView

NET stock has some highly encouraging technicals. It has formed an ascending channel and is slowly nearing its all-time high. 

The stock has formed a near-perfect ascending channel. At the same time, it has remained above the 50-day Exponential Moving Average (EMA).

The Relative Strength Index (RSI) has reversed and moved above the neutral level of 50. Therefore, the path of the least resistance for the shares is bullish, with the initial target of $331, its all-time high. A move above that price will point to more gains, potentially to the psychological level of $400.