Should You Buy, Sell or Hold NET Stock After a 68.5% YTD Surge?
Cloudflare NET has enjoyed a remarkable 68.5% surge in the year-to-date period, outperforming the Zacks Internet - Software industry's return of 12.9%.
With such a stellar performance, investors are left wondering — should they double down on NET stock, or is caution the wiser path?
Cloudflare YTD Performance Chart
Strength in SASE and Zero Trust Aids Cloudflare's Growth
Cloudflare's secure access service edge (SASE) platform is gaining rapid adoption among enterprises as it offers modernized and simplified network security and connectivity. NET recently secured its longest SASE deal in the first quarter of fiscal 2025. The company has also expanded its geographical reach in Latin America through collaboration with TD SYNNEX.
Since Cloudflare provides an end-to-end cloud-based secured SASE solution that simplifies the adoption process for its clients, it is winning larger deals. Cloudflare combines its Zero Trust security products like Cloudflare Gateway, remote browser isolation and cloud access security broker with its Network Services like Magic WAN, Magic Transit and Magic Firewall, Cloudflare Network Interconnect.
Cloudflare's presence is rapidly expanding in the Zero Trust cybersecurity space, where it has made integrations with companies like Atlassian, Microsoft and Sumo Logic, to enable small, medium and large-sized businesses to secure reliable tools and applications with enterprise-ready Zero Trust security.
Based on this approach, NET has been witnessing tremendous customer growth in Zero Trust solutions and network services like Magic Transit in Cloudflare One. For instance, Cloudflare One Zero Trust platform is used by more than 10,000 companies worldwide.
Rapid Adoption of Workers Developer Platform Drives Cloudflare
Cloudflare Workers started as a serverless platform where developers could build, deploy, and scale applications across Cloudflare's global network. The platform was developed for convenience as it enables developers to take actions using a single command and reduces infrastructure management and configuration complexities and brings applications closer to users.
The Workers AI tool integrated in the Workers developer platform has witnessed an explosive 4,000% year-over-year surge in inference requests as reported in first-quarter earnings. Cloudflare is now focusing on enriching its Workers platform with the Model Context Protocol server, which will enable clients to deploy AI agents to simplify tasks like managing workflows, handling transactions, or querying business data.
These value additions to its platform will lead to upsells and customer acquisition, hence boosting this platform's growth. In its latest quarterly results, NET announced that its total customer base has reached the milestone of 250,819 paying customers, up 27% year over year.
Due to all these positive factors, analysts are optimistic about the stock's future growth. The Zacks Consensus Estimate for fiscal 2025 and 2026 revenues is projected to grow 25.38% and 26%, respectively. The Zacks Consensus Estimate for 2025 and 2026 earnings is projected to grow 5.3% and 31.6%, respectively. Cloudflare beat the Zacks Consensus Estimates in three of the trailing four quarters while matching the same on one occasion, with an average surprise of 14.88%.
Key Challenges Faced by Cloudflare
A substantial portion of the company's sales is derived from outside the United States. During the full 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.
Moreover, NET operates in a highly competitive environment. In its content delivery space, companies like Amazon AMZN, Akamai Technology and Fastly compete with Cloudflare. While in the cyber security space, a range of competitors 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' SASE platform has an active customer user base of more than 6,000. 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.
Zscaler, on the other hand, leads the Zero Trust space and also offers SASE solutions. The company offers Zero Trust Network Access solutions through Zscaler Private Access, which enables secure application access without VPN. ZS is now moving toward the Zero Trust Everywhere model, which secures cloud, endpoint and network. Zscaler also provides a full SASE platform by combining identity access, private access and cloud protection.
NET's Valuation Suggests the Stock's Overvaluation
Cloudflare is trading at a 12-month forward P/S ratio of 25.43X, significantly above the industry average of 6.97X.
Cloudflare Forward 12 Month P/S Valuation Chart
What Should Investors Do?
While Cloudflare's recent stock surge and strong market position are encouraging, its high valuation warrants caution. Therefore, we believe new investors should wait for a better entry point and existing investors should retain Cloudflare, which currently carries a Zacks Rank #3 (Hold), given the modest growth prospects and a stretched valuation in the near term. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
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