Cloudflare Inc. NET has struggled over the past month, shedding 9.4% of its value and underperforming the Zacks Internet – Software industry, which declined 6.4% during the same period. The stock has also lagged behind peers like Q2 Holdings QTWO, Toast TOST and Freshworks FRSH.
One-Month Price Return Performance
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Despite this recent weakness, Cloudflare’s long-term growth prospects remain intact, making a compelling case for holding the stock. With robust financials, expanding enterprise adoption and artificial intelligence (AI)-driven innovation, the company is well-positioned to bounce back once broader market pressures ease.
Broader Market Weakness Drags Cloudflare Lower
Cloudflare’s recent decline has more to do with broader market headwinds than company-specific challenges. A widespread tech sell-off fueled by fears of a global economic slowdown and escalating trade tensions has weighed heavily on high-growth stocks, including Cloudflare.
The stock has plunged 28.1% from its 52-week high of $177.37 (reached on Feb. 14) amid this broader correction. Cloudflare’s year-to-date gain has shrunk to 18.4%, down significantly from 59% at its February peak.
Cloudflare YTD Price Return Performance
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However, this correction doesn’t reflect Cloudflare’s strong operational performance or growth potential. Long-term investors should view this decline as a temporary setback rather than a sign of fundamental weakness.
Cloudflare’s Strong Q4 Results Signal Resilience
Cloudflare’s fourth-quarter 2024 results, reported on Feb. 6, highlighted its ongoing strength. The company delivered revenues of $459.9 million, marking a 27% year-over-year increase and surpassing the Zacks Consensus Estimate by 1.8%. Non-GAAP earnings per share (EPS) came in at 19 cents, reflecting a 26.7% annual increase and beating estimates by 5.6%.
Cloudflare, Inc. Price, Consensus and EPS Surprise
Cloudflare, Inc. price-consensus-eps-surprise-chart | Cloudflare, Inc. Quote
A key highlight was the 27% year-over-year growth in large customers, with 3,497 enterprise clients now spending more than $100,000 annually on Cloudflare’s services. Large customers contributed 69% of total sales, up from 66% in the year-ago quarter. This signals growing demand from larger enterprises, which provides revenue stability and reduces reliance on smaller, more volatile clients.
Additionally, Cloudflare’s dollar-based net retention rate improved by one percentage point sequentially to 111%, demonstrating that existing customers are increasing their spending — a positive indicator for future growth.
Cloudflare’s Improved Sales Execution and Key Customer Wins
Cloudflare’s improved sales execution is another reason to hold the stock. The company’s go-to-market strategy saw significant improvements in the fourth quarter, with 80% of new sales hires focused on enterprise clients. This strategic pivot is expected to drive larger deal wins in 2025.
Notable customer wins in the last reported quarter included a $20 million five-year contract with a Fortune 100 technology firm and a $13.5 million deal with a leading AI company, expanding its existing partnership. These high-profile deals highlight Cloudflare’s growing enterprise traction and validate its long-term expansion strategy.
Cloudflare’s Robust Profitability and Cash Flow Trends
Cloudflare’s profitability metrics also remain strong. In the fourth quarter, the company reported an operating income of $67.2 million, a 69% year-over-year increase, with the operating margin expanding 360 basis points to 14.6%. This reflects improved operational efficiency and disciplined cost management.
Free cash flow came in at $47.8 million for the fourth quarter and $166.9 million for full-year 2024, showcasing financial resilience despite ongoing growth investments.
For 2025, Cloudflare forecasts 25% year-over-year revenue growth, with projected sales in the range of $2.90 billion-$2.94 billion. The company also plans to increase capital expenditures to 12-13% of total revenues as it invests in AI infrastructure and expands its platform capabilities.
AI and Security: Cloudflare’s Key Growth Drivers
Cloudflare’s increasing focus on AI and Zero Trust security offers compelling long-term growth potential. The company’s Zero Trust platform, which protects businesses from cyber threats, continues to gain traction. In the fourth quarter, Cloudflare secured a three-year, $4 million SASE (Secure Access Service Edge) contract with a major U.S. investment firm, strengthening its position in enterprise security.
On the AI front, Cloudflare’s Workers AI and AI Gateway platforms are becoming major growth catalysts. These solutions enable businesses to optimize performance and security for their AI workloads.
Cloudflare’s management revealed that its AI offerings deliver up to 10 times price performance improvements over traditional hyperscalers. As AI adoption accelerates, Cloudflare’s multi-cloud and edge computing capabilities make it a critical infrastructure provider in this rapidly growing segment.
Conclusion: Hold Cloudflare Stock for Now
While Cloudflare’s recent valuation correction introduces short-term volatility, its long-term growth prospects remain strong. The company’s expanding enterprise client base, strong financial performance and AI-driven innovation position it for sustained growth.
For patient investors, holding Cloudflare stock is a prudent move. With its market-leading cloud and security solutions, Cloudflare is well-equipped to regain momentum as market conditions stabilize. NET carries a Zacks Rank #3 (Hold) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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This article originally published on Zacks Investment Research (zacks.com).
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