Cloudflare (NYSE: NET) stock surged 4.5% through 10:10 a.m. ET Tuesday after analysts at Bank of America double-upgraded the stock from underperform (i.e., sell) to buy, as Street Insider reported this morning.
Curiously, BofA upgraded Cloudflare, which is often thought of primarily as a cybersecurity stock, for another reason entirely: BofA likes Cloudflare’s artificial intelligence (AI) business.
Cloudflare doesn’t break its business out among separate segments when reporting earnings. As a result, historically, many investors have considered the company a cybersecurity stock — which is no surprise. Street Insider notes the company’s security products already have 33% market penetration.
But as my colleague Harsh Chauhan pointed out last month, while Cloudflare does offer a content delivery network (CDN) that secures internet connections, over the past year and a half, it also has been deploying graphics processing units (GPUs) across its network that enable Cloudflare customers to run AI workloads in the cloud.
In other words, as time goes on, cybersecurity stock Cloudflare is becoming more and more an AI stock.
BofA believes Cloudflare’s AI-as-a-service offering “is already resonating with customers,” and has become “the leading product Cloudflare customers are looking to adopt in the next twelve months.” Predicting Cloudflare is now on track to meet or exceed full-year revenue guidance, and arguing the company could grow as fast as 30% annually over the next three years, BofA isn’t just upgrading the stock. It’s nearly tripling its price target to $160 a share.
S&P Global Market Intelligence data show Cloudflare has maintained a 36.5% average annual revenue growth rate over the last three years. While not yet profitable under generally accepted accounting principles (GAAP), the company did generate $166.5 million (after deducting capital expenditures and capitalized software costs) last year.
That’s pretty impressive. Still, at a $44.8 billion market capitalization, it means Cloudflare stock trades for a nosebleed 269 times trailing free cash flow, and 194 times projected 2025 FCF. Even with a 30% growth rate, that seems too expensive to me.
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