The stock of Nvidia (NVDA 6.18%) has been a massive winner, jumping 450% over the past three years as the leader of the artificial intelligence (AI) revolution.
Nvidia should continue to be a strong stock, but at a $2 trillion market cap and 36 times this year's earnings estimates, it would be hard-pressed to repeat that performance over the next three years.
Yet the AI revolution should also benefit a host of other tech names, including those that still remain well below their 2021 highs. For potentially bigger upside, investors should tune into this sneaky AI inference play that could really take off over the next few years.
Cloudflare has been strong but could get stronger
Not many people recognize networking and security leader Cloudflare (NET 1.44%) as an AI play. After all, the company got its start as a website, content delivery, and software-application performance-enhancer, helping enterprises large and small boost the performance of their websites and applications. From there, the company expanded into cybersecurity, protecting those websites and applications from attacks. Then Cloudflare was able to leverage its global footprint in ISP data centers to unveil smart networking products, offering security and simplification by unifying an enterprise's on-premises data centers with public and private clouds all in one easy interface.
Cloudflare built its software products out of a single software stack on commodity hardware, which gives it a leg-up on rivals that may have to switch software and hardware configurations based on different products. And with its speed-boosting services benefiting internet service providers (ISPs), Cloudflare has been able to put its servers directly within ISP data centers worldwide. That's led to a massive current footprint spanning 310 cities in over 120 countries, interconnecting over 13,000 global networks.
That architecture and footprint make it really easy for Cloudflare to deploy new products relative to rivals.
How Cloudflare's network has set it up for the AI revolution
Cloudflare's flexible software and massive network have positioned it extremely well for the next phase of the artificial intelligence revolution. The past 18 months or so have seen AI companies largely concentrating on training AI models like ChatGPTs, Geminis, or Llamas, largely within cloud-data centers.
But now the AI industry will move to more inferencing as enterprises and customers begin to deploy and interact with those models in a variety of ways.
That's where Cloudflare's global-edge network comes in handy. Aside from networking and secure edge, Cloudflare has in recent years deployed a developer platform on its servers called Workers. Workers allows developers to augment or develop lightweight applications in Cloudflare servers without having to travel all the way back to a larger cloud-data center.
The Workers platform is newer but has become popular. Thus, it's not surprising Cloudflare eventually found a way to serve the computing-intensive AI market on Workers, unveiling Workers AI in September of last year.
Image source: Getty Images.
Workers AI could be a big deal
Workers AI is essentially an inference-as-a-service platform Cloudflare developed by deploying graphics processing units (GPUs) across its server platform. Because of Cloudflare's flexible software stack, the company has been able to seamlessly drop this offering into its existing server footprint rather quickly.
Workers AI allows developers to use some of the most popular open-source AI models, such as Meta Platforms' Llama or Hugging Face already configured for Cloudflare's infrastructure, then seamlessly add proprietary data in a secure manner via Cloudflare Vectorize. That puts Cloudflare more in direct competition with the cloud giants for AI model building and processing, at least for smaller models.
But the big opportunity may just be running all your inferencing within Cloudflare's servers as opposed to sending that processing traffic back to public clouds. As CEO Matthew Prince noted on the fourth-quarter conference call with analysts:
[W]e think that -- you know, that we're ... Goldilocks in that space where, you know, the -- the centralized public clouds are too far away and your ... device that you're holding in your hand or wearing on your wrist is -- often doesn't have enough power, but where we are sitting in between gives that really incredible place for inference.
Given that we are just at the start of the AI era and that so many applications will now be run via AI inference in the future, it's not hard to see how the inference market could become massive in the next decade. And Cloudflare may be ideally positioned to capitalize.
Early results are already promising. Management noted daily Workers AI requests increased a whopping ninefold just between the September launch and December. Additionally, Workers AI has brought in many new customers to the overall Workers developer platform, an added cross-selling bonus for Cloudflare.
NET Percent Off All-Time High data by YCharts.
Cloudflare: Expensive but 57% below 2021 highs
At first glance, Cloudflare looks wildly expensive at over 25 times sales. But on the other hand, Cloudflare remains 57% below its all-time highs. Moreover, the company has shown a steady improvement in operating leverage as it grows, with adjusted operating margins expanding from 1% in 2021 to 9% in 2023, and adjusted free-cash-flow margins expanding from 7% to 9% over that time.
With a strong recent earnings report and potential AI inferencing tailwinds bolstering growth over the next few years, investors should at the very least monitor Cloudflare's stock for a potential entry. And growth-oriented investors may wish to consider taking a position even at these levels.
