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Cloudflare Expands Its Web Portfolio: What Should Investors Do?
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Cloudflare (NET - Free Report) shares have plunged 13.6% in the past six months against the S&P 500 index’s return of 9.3%. NET shares have also underperformed both the Zacks Internet Software Industry and the Zacks Computer and Technology Sector’s return of 2.8% and 10%, respectively.
NET’s underperformance can be attributed to investors’ concerns about near-term prospects amid the company’s decelerating sales growth. Softening IT spending amid ongoing macroeconomic uncertainties is hurting Cloudflare’s top-line growth. Nevertheless, Cloudflare is continuously adding new products to its portfolio in an attempt to gain more customers. Recently, NET launched Speed Brain, a product that minimizes the loading time of web pages by 45%.
At present, Cloudflare Speed Brain speculates user intent by tracking the hovering of the cursor and pre-loading the web pages where it expects the user to go. Speed Brain tracks the clicks and the movement of the cursor around page links and downloads the webpage to the cache before a user navigates to it.
Cloudflare is planning to increase the accuracy of this product by implementing machine learning and artificial intelligence (AI) for better predictions. The enhanced product is expected to utilize user’s previous web traffic and requests, and combine it with AI to render pages instantly.
Cloudflare Six Months Performance
Image Source: Zacks Investment Research
Cloudflare Expands Its Product Portfolio
So far this year, NET has launched numerous products, including Cloudflare for Unified Risk Posture, Magic Cloud Networking, Firewall for AI and Defensive AI. The company has also expanded its capabilities through partnerships with CrowdStrike (CRWD - Free Report) , NVIDIA (NVDA - Free Report) , Microsoft (MSFT - Free Report) and Hugging Face Hub in the past year.
Cloudflare for Unified Risk Posture leverages NET’s Secure Access Service Edge and application security capabilities to identify, monitor and mitigate cyber threats across all environments. NET’s Magic Cloud Networking provides the fastest ways to connect and secure the enterprise cloud environment. Firewall for AI protects Large Language Models from cyberattacks by providing a security layer. Defensive AI protects devices exposed to the Internet from AI-based cyberattacks.
Its partnerships with companies are focused on cybersecurity and AI. Cloudflare’s partnership with CrowdStrike, on the other hand, combined NET’s Zero Trust protection and CRWD’s AI-powered cybersecurity to prevent breaches on a large scale.
Cloudflare’s partnership with Microsoft was focused on enabling enterprise customers to deploy AI models across devices, network edges and cloud environments by leveraging ONNX runtime. In 2023, NET also announced that it will be using NVDA’s GPUs and Ethernet switches in its global network to bring AI close to its users.
Near-Term Challenges for NET Stock
Although Cloudflare has experienced impressive growth since its IPO in 2019, recent quarterly reports indicate a slowdown. The company's revenue growth, while still robust, is not as explosive as in previous years.
Cloudflare enjoyed nearly 50% year-over-year top-line growth until 2022. However, the growth rate decelerated to 33% in 2023. Current estimates for 2024 and 2025 suggest further deceleration to around 27%.
Similarly, Cloudflare has seen tremendous improvement in its bottom-line results over the past few years, turning profitable on a non-GAAP basis in 2022 and registering a robust 272% increase in 2023. However, earnings growth for 2024 and 2025 is projected to be around 45% and 18%, respectively.
We believe that near-term prospects are expected to have been hurt by softening IT spending as enterprises postpone large tech investments due to macroeconomic uncertainties and geopolitical issues.
NET operates in a highly competitive market that contains several large and established on-premises, appliance-based solutions and cloud-based services providers. Industry leaders like Palo Alto, Check Point, F5 and Fortinet, with their large infrastructure, escalate competitive challenges for Cloudflare, causing fewer subscriptions, reduced revenues and increased losses.
Conclusion
Cloudflare’s strong market positioning and sustained focus on expanding its product portfolio are encouraging. However, the company's slowing growth rates, competitive pressures and macroeconomic uncertainties pose near-term risks.
Image: Bigstock
Cloudflare Expands Its Web Portfolio: What Should Investors Do?
Cloudflare (NET - Free Report) shares have plunged 13.6% in the past six months against the S&P 500 index’s return of 9.3%. NET shares have also underperformed both the Zacks Internet Software Industry and the Zacks Computer and Technology Sector’s return of 2.8% and 10%, respectively.
NET’s underperformance can be attributed to investors’ concerns about near-term prospects amid the company’s decelerating sales growth. Softening IT spending amid ongoing macroeconomic uncertainties is hurting Cloudflare’s top-line growth. Nevertheless, Cloudflare is continuously adding new products to its portfolio in an attempt to gain more customers. Recently, NET launched Speed Brain, a product that minimizes the loading time of web pages by 45%.
At present, Cloudflare Speed Brain speculates user intent by tracking the hovering of the cursor and pre-loading the web pages where it expects the user to go. Speed Brain tracks the clicks and the movement of the cursor around page links and downloads the webpage to the cache before a user navigates to it.
Cloudflare is planning to increase the accuracy of this product by implementing machine learning and artificial intelligence (AI) for better predictions. The enhanced product is expected to utilize user’s previous web traffic and requests, and combine it with AI to render pages instantly.
Cloudflare Six Months Performance
Image Source: Zacks Investment Research
Cloudflare Expands Its Product Portfolio
So far this year, NET has launched numerous products, including Cloudflare for Unified Risk Posture, Magic Cloud Networking, Firewall for AI and Defensive AI. The company has also expanded its capabilities through partnerships with CrowdStrike (CRWD - Free Report) , NVIDIA (NVDA - Free Report) , Microsoft (MSFT - Free Report) and Hugging Face Hub in the past year.
Cloudflare for Unified Risk Posture leverages NET’s Secure Access Service Edge and application security capabilities to identify, monitor and mitigate cyber threats across all environments. NET’s Magic Cloud Networking provides the fastest ways to connect and secure the enterprise cloud environment. Firewall for AI protects Large Language Models from cyberattacks by providing a security layer. Defensive AI protects devices exposed to the Internet from AI-based cyberattacks.
Its partnerships with companies are focused on cybersecurity and AI. Cloudflare’s partnership with CrowdStrike, on the other hand, combined NET’s Zero Trust protection and CRWD’s AI-powered cybersecurity to prevent breaches on a large scale.
Cloudflare’s partnership with Microsoft was focused on enabling enterprise customers to deploy AI models across devices, network edges and cloud environments by leveraging ONNX runtime. In 2023, NET also announced that it will be using NVDA’s GPUs and Ethernet switches in its global network to bring AI close to its users.
Near-Term Challenges for NET Stock
Although Cloudflare has experienced impressive growth since its IPO in 2019, recent quarterly reports indicate a slowdown. The company's revenue growth, while still robust, is not as explosive as in previous years.
Cloudflare enjoyed nearly 50% year-over-year top-line growth until 2022. However, the growth rate decelerated to 33% in 2023. Current estimates for 2024 and 2025 suggest further deceleration to around 27%.
Similarly, Cloudflare has seen tremendous improvement in its bottom-line results over the past few years, turning profitable on a non-GAAP basis in 2022 and registering a robust 272% increase in 2023. However, earnings growth for 2024 and 2025 is projected to be around 45% and 18%, respectively.
We believe that near-term prospects are expected to have been hurt by softening IT spending as enterprises postpone large tech investments due to macroeconomic uncertainties and geopolitical issues.
NET operates in a highly competitive market that contains several large and established on-premises, appliance-based solutions and cloud-based services providers. Industry leaders like Palo Alto, Check Point, F5 and Fortinet, with their large infrastructure, escalate competitive challenges for Cloudflare, causing fewer subscriptions, reduced revenues and increased losses.
Conclusion
Cloudflare’s strong market positioning and sustained focus on expanding its product portfolio are encouraging. However, the company's slowing growth rates, competitive pressures and macroeconomic uncertainties pose near-term risks.
Additionally, NET’s present valuation is highly stretched, as reflected by the Zacks Value Score of F. Considering these factors, it is prudent for investors to wait for a better entry point to accumulate shares of this Zacks Rank #3 (Hold) company. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.