Cloudflare: AI Stock to Buy Ahead of a Breakout Year in 2025

Cloudflare (NET) has been making waves in the tech industry, and a Wall Street analyst predicts a breakout year for the company in 2025. Morgan Stanley analyst Hamza Fodderwala has outlined a bull-case scenario for Cloudflare to advance by another 16% to $175 per share by year's end, and he may revise his forecast higher in light of its strong performance in the recent quarter. Fodderwala believes that 2025 could be a breakout year for Cloudflare due to the convergence of several tailwinds for the company, including increased sales team productivity and the monetization of new artificial intelligence (AI) products.

Cloudflare provides application, network, and security services that protect and accelerate IT infrastructure. It operates the fastest cloud network on the planet, handling about 20% of all internet traffic. This affords Cloudflare deep insight into performance issues and security threats across the web, which continuously enhances its ability to route traffic quickly and safely. In the fourth quarter, Cloudflare reported strong results, beating Wall Street's expectations on the top and bottom lines. Its customer count increased by 25% to 237,714, marking its third straight quarter of acceleration in customer growth, and its average established customer spent 11% more than a year prior. In turn, revenue climbed by 27% to $460 million, and non-GAAP net income increased by 27% to $0.19 per diluted share, a 2 percentage point acceleration from the previous quarter.

Last year, Cloudflare hired former Palo Alto Networks President Mark Anderson to lead its sales organization. This personnel change was part of a broader effort to improve its go-to-market execution, and the company has made good progress. CEO Matthew Prince said on the fourth-quarter earnings call that sales productivity showed a double-digit percentage improvement for the fifth consecutive quarter. Prince also discussed the strong adoption of the company's Workers development platform, particularly for artificial intelligence use cases. He said Workers is positioned to "become the go-to platform for developers who want the best price performance for AI inference and agentic workflows."

Cloudflare's edge AI strategy, particularly its R2 Storage and Workers AI products, positions it to capitalize on the growing demand for edge computing and AI services. Edge clouds provide infrastructure services from the network edge, and Grand View Research estimates edge computing sales will grow at an annualized rate of 36% through 2030, driven by demand for edge AI services. Cloudflare began leaning into that opportunity in earnest with its launch of R2 Storage and Workers AI in 2023. R2 Storage lets developers cost efficiently store large amounts of data for training AI models, while Workers AI is an inference service, supported by Nvidia GPUs, that lets developers run AI applications on Cloudflare's network. Those products are compelling not only because Cloudflare has the fastest cloud network but also because that network is agnostic, meaning it integrates with public clouds like Amazon and Microsoft.

Importantly, Forrester Research recognized Cloudflare as the market leader in edge development platforms, ranking Workers higher than similar products from Amazon, Microsoft, and Fastly. Likewise, International Data Corporation ranked Cloudflare as a segment leader in its latest report on edge delivery services, highlighting its focus on AI as a key strength.

However, Cloudflare's stock looks expensive at its current valuation of 200 times adjusted earnings. Wall Street expects Cloudflare's adjusted earnings to grow by 15% in the next four quarters, and increase at an annualized rate of 37% over the next three years. But Wall Street may be underestimating the company's future growth. Cloudflare's earnings beat analysts' consensus estimates in the last six quarters by an average of 27%. If that pattern continues, the stock's current valuation may look more reasonable in hindsight. But investors should be careful chasing this stock at its current price. A more prudent course of action would be to add Cloudflare to your watch list and wait for opportunities to buy shares on dips.

In conclusion, Cloudflare's strong earnings growth, customer acquisition, and strategic initiatives position it for a potential breakout year in 2025. Its edge AI strategy, particularly its R2 Storage and Workers AI products, aligns with the growing demand for edge computing and AI services. While the stock may look expensive at its current valuation, investors should monitor the company's performance and consider adding it to their watchlist for potential buying opportunities. As always, investors should conduct their own research and consider seeking advice from a financial advisor before making investment decisions.