Cloudflare (NET) Could Become the Story Stock of the Next AI Wave

By Eric Bleeker Updated Oct 27, 8:53PM EDT · Published Aug 11, 11:26PM EDT

Key Points

Growth Potential: Last quarter, Cloudflare demonstrated needed revenue acceleration, increasing from 26.5% to 28% last quarter. At the company’s current valuation, it will need to continue surpassing Wall Street targets or else shrares will be punished.
Market Sentiment: Despite a positive earnings report, Cloudflare’s stock saw a sell-off the next morning. This sell-off was more due to general market fears than anything ‘worrisome’ in Cloudflare’s actual earnings release.

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Cloudflare (NET) Could Become the Story Stock of the Next AI Wave — © Canva

Watch Our Video on Why Cloudflare Could Become the Next ‘AI Story Stock’

In a recent AI Investor Podcast discussion, 24/7 Wall St. analysts Eric Bleeker and Austin Smith dove into the recent performance and future prospects of Cloudflare (NYSE: NET | NET Price Prediction), highlighting the company’s impressive revenue growth in their most recent quarter.

The company reported revenue growth accelerating from 26.5% to 28% last quarter. However, despite these encouraging figures, the stock sold off the next morning, raising questions about market expectations and investor sentiment.

Eric noted that while CloudFlare’s valuation remains high, with a price-to-revenue ratio of 35 times this year’s revenue, the company’s narrative and growth trajectory are compelling. He further remarked, “They took revenue up… they raised full year expectations. It’s just exactly the game plan you need to follow.”

This sentiment underscores the belief that Cloudflare could emerge as a leading ‘story stock’ in the current AI landscape as the usage of inferencing skyrockets in the years ahead.

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Transcript

Austin Smith: Excellent point. Okay, onto CloudFlare.

Eric Bleeker: My main point on this would be that we are seeing the first signs of their inflection point moving up. The company is expensive, as we’ve discussed many times, but the potential is significant, positioning it as a story stock of this age.

They increased revenue from 26.5% last quarter to 28%. They raised full-year expectations, which is exactly the game plan needed. You need a great narrative and this kind of acceleration. Everything looks good, and they are highlighting their Workers’ development platform, which has seen record wins. It seems they are finding growth in the right areas.

Why did the stock drop after earnings? It’s hard to say. Expectations are very high.

They did what was expected with the beat and raise, but we are seeing a little bit of a sell-off today [the day after earnings].

The broader market is down 2%, and any stock at 35 times this year’s revenue is at risk during a steep market sell-off.

I would suggest that if you’re interested in CloudFlare, keep it at the top of your list. If there are market sell-offs, it could be an idea that may be too expensive today. However, the early signs of what we expect to be a long-term story are developing this quarter.

About the Author Eric Bleeker, CFA →

Eric Bleeker has been investing for more than 20 years. He began his career working at Microsoft before joining Motley Fool, one of the largest publishers of financial research. In his 15 years at Motley Fool Eric served as the General Manager for Fool.com and led coverage in the Technology & Telecom sector. In addition, he was a featured columnist and has hosted dozens of investing seminars attended by more than a million total investors. Eric has more than 1,000 financial bylines to his name and has been featured in The Wall Street Journal, CNBC, Fox Business, and many other leading publications. He is currently focused on artificial intelligence investing and is a CFA Charterholoder.