Cloudflare (NET 13.30%) had a terrible run on the stock market in 2022 amid the broader sell-off as investors were shunning high-growth companies amid rising interest rates and surging inflation, but the picture has changed in recent months thanks to favorable economic data points and the arrival of a new catalyst for the company in the form of generative artificial intelligence (AI).
Shares of Cloudflare, a company that helps secure internet connections and makes them reliable through its cloud-based security and performance solutions, shot up 33% so far this year. More importantly, this hot rally seems here to stay, as Cloudflare's latest quarterly results suggest that it is scratching the surface of a potentially huge opportunity.
NYSE: NET
Key Data Points
Cloudflare is growing at a red-hot pace
Cloudflare released fourth-quarter 2022 results on Feb. 9, revealing an impressive revenue jump of 42% over the prior-year period to $275 million. Its adjusted net income jumped to $0.06 per share from breakeven in the year-ago quarter. The company ended 2022 with total revenue of $975 million, a big jump of 49% over 2021. Its non-GAAP net income of $0.13 per share was also a big improvement over 2021 levels of $0.05 per share.
Cloudflare's terrific growth was driven by the rapid adoption of its offerings, which is evident from the jump in the company's customer base and higher customer spending on its solutions. The company ended 2022 with 162,000 paying customers, a 16% increase over 2021. More importantly, the number of customers who spent at least $100,000 on Cloudflare's platform over the past year increased to 2,042 in the fourth quarter of 2022 from 1,416 in Q4 2021, a 44% increase.
The company's guidance suggests it is set for another year of healthy growth. Cloudflare anticipates $1.34 billion in revenue this year, which would be a 37% jump over 2022. Adjusted earnings are expected to land between $0.15 and $0.16 per share. But don't be surprised to see Cloudflare turning in stronger growth this year as the company claims that it is sitting on an addressable market worth $125 billion.
Throw in the emerging possibilities in the generative AI market that CEO Matthew Prince discussed on the latest earnings conference call, and there is another solid reason to believe that Cloudflare may have a better-than-expected year in 2023 and beyond.
There's a massive opportunity that investors shouldn't miss
Prince pointed out on the conference call that a "leading generative AI company signed a one-year $1 million deal" with Cloudflare last quarter.
Going into the details, the CEO pointed out that the company had been a free user of Cloudflare's services since 2017, but it struck a deal when "their browser-based application debuted in late November, [and] demand for the company's AI-generated content absolutely exploded with unprecedented rates of adoption." Reading between the lines, it looks like this generative AI company that has decided to use Cloudflare's offerings is none other than OpenAI, whose ChatGPT AI-enabled chatbot has gained immense traction in a short span since its launch in November last year.
The chatbot was reportedly being used by 13 million users daily in January, and it has already attracted more than 100 million users in just two months of launch. OpenAI is a Microsoft-backed company, which owns the hugely popular Azure cloud service.
However, the spurt in ChatGPT's adoption meant that the Azure cloud service "quickly proved insufficient at handling the massive load on their services from legitimate users, as well as keeping fraudulent users from exhausting their resources," according to Prince. As a result, OpenAI turned to Cloudflare, and the good part is that the latter is exploring ways to support the former's incredible growth. Given that Microsoft will reportedly invest $10 billion in ChatGPT, Cloudflare could be sitting on a new opportunity in generative AI, as big tech giants are likely to invest big time in this area.
It is estimated that the global generative AI market could be worth $200 billion by 2032, as compared to just $10 billion last year, according to Polaris Market Research. Not surprisingly, tech giants are now in a race to capitalize on this opportunity. Cloudflare could win big from this, since its security solutions and other offerings are already being adopted by AI companies, as CEO Prince explained on the call.
The stock could jump higher
Cloudflare's solid guidance and management's comments over the conference call about generative AI should be tailwinds for this tech stock in 2023 and beyond.
The company was already targeting $5 billion in annual revenue in the next five years, a 5x increase over its 2022 top line. And now with the latest catalyst that has come into play, don't be surprised to see Cloudflare achieve its objective at a faster pace than before, which is why savvy investors may want to buy this tech stock before it is too late.
