Should One Purchase Cloudflare Shares at This Moment?
Unfiltered Take on Cloudflare's Stock Surge
Cloudflare's stock has experienced a scorching six-month streak, climbing an astounding 60%. The catalyst? The company's burgeoning growth profile, fueled by the success of its AI-centric offerings. With an impressive expansion of its total addressable market to an estimated $222 billion over the next three years, Cloudflare seems poised for a bright future.
But, with such impressive gains, it's natural for investors to question whether it's still a worthwhile investment. With a price-to-sales (P/S) ratio of 27, Cloudflare has certainly priced itself into premium territory. This is significantly higher than its five-year average sales multiple and way above the S&P 500 index's P/S ratio of 3.1. And yet, it's worth noting that Cloudflare's forward earnings multiple stands at a lofty 150.
Navigating the IT spending environment has proven challenging for Cloudflare. While revenue growth expectations for 2024 remain solid at 28%, customers are scrutinizing deals and seeking higher returns on their investments. CEO Matthew Prince admitted on the company's earnings call that certain larger deals in the U.S. were missed in Q3 2024 due to sales force restructuring.
Despite these challenges, the compelling potential of Cloudflare's AI offerings has shone through. The company's Workers AI platform, enabling customers to run AI models on its global server network, saw significant traction in Q3 2024. A notable example of this success was a $7 million contract, up from the $500,000 contract signed in Q2.
The demand for AI services in the cloud is expected to soar, and Cloudflare's massive customer base of over 221,000 paying customers offers an ideal chance for cross-selling AI services. With plans to invest in more graphics processing units (GPUs) in 2025, Cloudflare aims to better support the growing demand for its services.
This investment, however, will undoubtedly impact the company's earnings growth in 2025, with consensus estimates predicting a 15% increase to $0.85 per share, following an estimated 52% jump in 2024. But, as the charts suggest, Cloudflare's earnings growth may accelerate from 2026 onwards.
The stock may undergo a correction as it wrestles with the spending environment and AI infrastructure development. But, such a correction could present a golden opportunity for smart investors. If Cloudflare stock can be acquired at a more reasonable valuation, it could be a savvy investment.
With an impressive AI strategy bearing fruit and a vast customer base, Cloudflare could shape a prosperous future. Gartner projects a minor pick-up in global IT spending for 2025, which might propel Cloudflare's growth in line with market trends. But, as always, investors should approach this promising tech stock with the usual dose of caution and careful consideration.
Investors might be wondering if Cloudflare's current stock price, with a price-to-sales (P/S) ratio of 27, is still a good investment opportunity, considering its premium territory and significant increase over its five-year average sales multiple. Given the company's strong performance and AI offerings, some individuals might view a potential correction in the stock as a chance to invest at a more reasonable valuation.
Considering Cloudflare's impressive earnings growth, investors looking into finance and money might want to explore the possibility of investing in the company, especially as it aims to further support AI services with an increased investment in graphics processing units (GPUs) in 2025.
