While Cloudflare (NET +0.14%) stock got off to a flying start in 2025, even hitting its 52-week high in mid-February, the shares are down 39% since.
The cybersecurity and cloud solutions provider's solid fourth-quarter 2024 results had exceeded analysts' expectations and pointed toward improved growth prospects, thanks to the addition of artificial intelligence (AI)-related offerings. By mid February, the stock was up 63% for the new year.
However, amid the ongoing stock market turmoil, investors seemed to decide the stock was too expensive and chose to book profits.
NYSE: NET
Key Data Points
The market is now in a risk-off mode as the tariff-induced trade war has increased the chances of a recession. This explains why investors have been looking to preserve capital, and are selling richly valued stocks that have been, in recent months, flying high, thanks to catalysts such as AI.
Yet, the recent slide in high-growth stocks is arguably an opportunity for investors to buy potential long-term winners at relatively attractive multiples.
Is Cloudflare one such stock that you should consider buying? Let's find out.
Cloudflare is still expensive...
Cloudflare stock is trading at 22 times sales and 131 times forward earnings even after its recent slide. Those multiples are higher than Cloudflare's price-to-sales ratio and forward earnings ratio at the end of 2024. So, the stock has become more expensive, thanks to the terrific rally it witnessed initially in 2025.
As a result, Cloudflare doesn't seem worth buying right now. The expensive valuation exposes Cloudflare stock to more volatility, and there is a chance that it could head lower. Should the stock price fall further, resulting in more attractive valuations, the expanding market of the business would suggest a potential buying opportunity.
Let's look at the reasons why this tech stock could be worth buying at cheaper valuations.
...but it could grow at a terrific pace in the long run
Cloudflare finished 2024 with $1.67 billion in revenue, an increase of 29% from the prior year. This figure is quite small when compared to the $222 billion total addressable market (TAM) size that the company is projecting in 2027. Cloudflare is anticipating a sizable increase in demand for its various services, such as content delivery network, cybersecurity, virtual private network, and AI, among others.
The good part is that Cloudflare has started capitalizing on this massive end-market opportunity by building a solid revenue pipeline for the future. This was evident from the 36% year-over-year increase in its remaining performance obligations (RPO) in the fourth quarter of 2024. This metric refers to the total value of a company's contracts that are yet to be fulfilled.
Cloudflare's RPO increased at a faster pace than its quarterly revenue growth of 27%. That's a good thing as it suggests that the company is landing new contracts at a stronger pace than at which it can fulfill them. This stronger jump in the RPO should ideally lead to an acceleration in Cloudflare's growth in the future, as it fulfills more contracts.
Additionally, the company's foray into the cloud-based AI infrastructure market could continue to strengthen its revenue pipeline. Cloudflare is offering customers access to Nvidia's data center graphics processing units (GPUs) so that they can train large language models (LLMs) and build AI applications without having to invest in expensive hardware.
Cloudflare's customers will only have to pay for the AI infrastructure they rent from the company. Management points out that its pay-as-you-go model is ideal for building applications, such as AI agents and other inference applications. The company anticipates healthy demand for its AI infrastructure going forward, which explains why it will be investing aggressively to improve capacity.
Cloudflare is also looking to tap the fast-growing market for securing AI applications from bad actors with its recently launched Cloudflare for AI platform. This platform will allow Cloudflare's customers to keep a tab on all the AI applications that are being used across the company's network, monitoring and managing the use of AI by employees and ensuring that the prompts submitted to AI models are in line with the intended usage guidelines.
Polaris Market Research estimates that the AI trust, risk, and security management market could jump by more than fivefold over the next decade, generating more than $16 billion in annual revenue.
The catalysts discussed above could eventually boost Cloudflare's growth as it lands more business and gains a bigger share of the wallets of existing customers. Not surprisingly, analysts are forecasting a pickup in Cloudflare's earnings growth in 2026 and 2027.
NET EPS Estimates for Current Fiscal Year data by YCharts.
So, investors would do well to keep an eye on this AI stock and consider buying it if it heads lower since it could turn out to be a profitable investment in the long run, thanks to the favorable growth drivers discussed above.
