NET Surges 87.3% in 3 Months: Should You Buy, Sell or Hold the Stock?
Cloudflare 3 Months Price Performance Chart
Why Did Cloudflare Stock Skyrocket?
Momentum in Cloudflare stock can be attributed to its success with Cloudflare One bookings, traction across its AI portfolio and increased acceptance by U.S. federal agencies, especially after FedRAMP certification. These factors have gained investors' confidence for now.
However, as a result of the recent gains in the stock price, NET is now trading at a significant premium compared with the Zacks Internet - Software industry. Its forward 12-month Price/Sales of 27.72X is higher than the Zacks Internet Software Industry's 5.7X.
NET Forward 12 Months (P/S) Valuation Chart
Cloudflare's near-term prospects remain foggy. The stock is not so cheap, as the Value Score of F suggests a stretched valuation at this moment. Cloudflare also faces some near-term and intrinsic challenges that might limit its growth trajectory.
Cloudflare Grapples With Macroeconomic Headwinds
A substantial portion of Cloudflare's topline is derived from outside the United States. During the years 2024, 2023, 2022, 2021 and 2020, NET earned approximately 49%, 48%, 47%, 48% and 49%, respectively, of its revenues from outside the United States. However, the U.S. government's aggressive stance on tariffs toward major economies is a concern for Cloudflare.
Cloudflare is seeing increased traction with pool of funds deals, where customers commit a large sum for flexible usage. These contracts can delay revenue recognition, thereby creating near-term headwinds for metrics like Dollar-Based Net Retention (DBNR), which remained flat at 111% in first-quarter 2025.
These factors are impacting NET's topline, which has been on a decline in the past three years. In 2022, NET's annual revenues grew at a rate of 48.6%. The 2023 revenue growth rate was 33%, while the 2024 growth rate was 28.8%. The company's full-year 2025 revenue guidance of $2.09-$2.094 billion implies just 25% growth, a further decline from its 2024 growth rate.
NET's Shrinking Margins Due to Competitive Environment
Cloudflare operates in a highly competitive environment. In its content delivery space, companies like Amazon AMZN, Akamai Technology and Fastly compete with Cloudflare. In the cybersecurity space, a range of companies like Palo Alto Networks PANW and Zscaler ZS compete with it. Amazon also competes with its developer platform through its general-purpose serverless and container-based edge deployment solutions.
Alphabet is implementing AI in its Cloud Run solution, Amazon's AWS Lambda & Lambda@Edge leverage deep integrations with AWS services, robust tooling and a mature developer base. Additionally, AWS Fargate is the AWS service that also enables serverless compute for containers. These solutions threaten the dominance of Cloudflare's developer platform.
Palo Alto Networks achieved 36% year-over-year growth in SASE ARR and 16% growth in $1 million-plus deals in the third quarter of fiscal 2025, making it a dominant SASE player. Furthermore, Zscaler's presence across multiple verticals, including SASE and zero trust, along with its rapid market expansion, puts Cloudflare under pressure from market expansion and product innovation.
To survive in the highly competitive cybersecurity market, each player must continually invest in broadening its capabilities. Over the past few years, Cloudflare has invested heavily to enhance its sales and marketing capabilities, particularly by increasing its international presence. This has negatively impacted its operating margins. Cloudflare's bottom-line growth rate is pegged at mid single digits for the full-year 2025.
What Should Investors Do?
While Cloudflare's recent stock surge and strong market position are encouraging, its high valuation warrants caution. Furthermore, as NET seems to grapple with macroeconomic and operational headwinds, investors should stay away from the stock at present. Cloudflare currently carries a Zacks Rank #5 (Strong Sell).
You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
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Stock #2: Bullish Signs Signaling to Buy the Dip
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Amazon.com, Inc. (AMZN): Free Stock Analysis Report
Palo Alto Networks, Inc. (PANW): Free Stock Analysis Report
Zscaler, Inc. (ZS): Free Stock Analysis Report
Cloudflare, Inc. (NET): Free Stock Analysis Report
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