Shares of Cloudflare (NET +3.00%) have shot up impressively so far this year, logging gains of 55% thanks to fast-growing demand for the company's artificial intelligence (AI)-focused offerings.
The company, which is primarily known for its content delivery network (CDN) that secures internet connections along with improving the performance and reliability of websites and applications, has been deploying graphics processing units (GPUs) across its network over the past year and a half. These GPUs enable Cloudflare customers to run AI workloads in the cloud.
The good news is that this move has been positively impacting the company's growth. The impact of AI on Cloudflare's growth was evident in the company's fourth-quarter 2024 results, which were released on Feb. 6 and led to an 18% spike in its stock price.
NYSE: NET
Key Data Points
Let's take a closer look at Cloudflare's latest quarterly report and check if the stock has the potential to sustain its impressive momentum.
AI is encouraging Cloudflare customers to spend more on its platform
Cloudflare finished 2024 with a 29% increase in revenue to $1.67 billion. Its non-GAAP net income shot up an impressive 53% to $0.75 per share. It is worth noting that Cloudflare's top and bottom lines exceeded its original guidance for 2024. In fact, its earnings grew at a much faster pace than the originally anticipated range of $0.58 to $0.59 per share.
The robust growth in the company's earnings can be attributed to the higher customer spending on its services. For instance, the number of customers who have generated more than $100,000 in annualized revenue for Cloudflare jumped 27% in 2024, slightly higher than the 25% growth in its overall paying customer base.
AI seems to be playing a central role in helping Cloudflare win a bigger share of its customers' wallets. Its Workers AI platform is an end-to-end solution that allows customers to run models in the cloud and build AI applications without having to invest in expensive infrastructure such as graphics cards. The company aims to "provide access to GPUs running on Cloudflare's massive global network to ensure AI inference can happen close to users for a low-latency end-user experience."
More importantly, Cloudflare's global network spans 330 cities in 120 countries. As Cloudflare deploys GPUs across this broad network to roll out AI services to customers, there is a good chance that it could witness stronger deal activity in the future. In the previous quarter, Cloudflare saw an expansion in its existing deals with customers using its AI services.
Management pointed out multiple instances of signing bigger contracts on the latest earnings conference call, saying Workers AI is witnessing solid traction among customers thanks to its low-cost nature. "The model of programming is uniquely suited for building tools like AI agents, and our serverless architecture, which allows you to pay only for what you use based on CPU or GPU type, positions Workers to become the go-to platform for developers who want the best price performance for AI inference and agentic workflows," CEO Matthew Prince said.
The good part is that the bigger contracts are helping Cloudflare build a robust revenue pipeline. This is evident from the 36% year-over-year increase in its remaining performance obligations (RPO) last quarter to $1.69 billion. This metric refers to the total value of a company's contracts that are yet to be fulfilled. So, the faster growth in RPO as compared to Cloudflare's top-line growth last quarter suggests that it is signing more contracts than it is fulfilling right now.
This should ideally lead to stronger top-line growth going forward, while the higher customer spending should result in improved unit economics. All this should set Cloudflare up for stronger growth in the future.
Is the stock still worth buying?
Cloudflare's impressive rally in 2025 has made the stock expensive. It is now trading at 34 times sales, while the forward earnings multiple of 200 is also quite rich. So, Cloudflare is definitely not in value territory.
The only way Cloudflare can sustain its strong start to the year is by delivering better-than-expected results and raising its guidance in the coming quarters. That should help the company justify its expensive valuation. As it turns out, Cloudflare has indeed beaten Wall Street's expectations in each of the last four quarters.
It won't be surprising to see that trend continue thanks to the company's fast-improving revenue pipeline on account of the growing adoption of its AI solutions. Moreover, the cloud infrastructure-as-a-service market that Cloudflare is targeting by offering GPU-based AI services is set to be massive in the long run, generating an estimated $580 billion in revenue in 2030 as per Goldman Sachs.
So, Cloudflare seems built for solid long-term growth, which is why investors who may be willing to buy the company despite its expensive valuation could be rewarded with more upside going forward. Meanwhile, investors with a lower risk appetite would do well to add Cloudflare to their watch lists and look for potential dips to accumulate shares of this fast-growing cloud company.
