2024-04-05 11:18:52 ET
Summary
- Cloudflare is expanding its edge infrastructure to support Gen AI models and launched Magic Cloud for multi-platform integration while it is well positioned in cybersecurity.
- It continues to generate strong revenue growth through the signing of record deals but this may have been at the expense of operating margins and the lower NRR cast doubts about the ability to retain customers.
- I support the possibility of facing cost pressures through industry research by Gartner and by elaborating on the competitive landscape.
- It also faces competition in the AI market from giant AWS and may experience volatility in case of a delay in monetizing AI, especially given the capital expenditure required.
- Therefore, based on valuation metrics and the price action following the fourth-quarter earnings call, I forecast that the stock could see a 25% downside.
For a company that is strong in network security, is expanding its edge infrastructure to make it easier for developers to work with Generative AI (Gen AI) models, and has launched Magic Cloud for customers to work seamlessly on multiple digital platforms, Cloudflare, Inc. ( NET ) seems positioned to grow strongly. Thus, after the announcement of record deals during the fourth quarter 2023 (Q4) earnings call, the stock surged by 25% as highlighted in green in the chart below, and was trading around $93 at the time of writing....
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Cloudflare: AI Overenthusiasm And Facing Cost Pressures (Rating Downgrade)