The past month has been a solid one for Cloudflare (NET 1.75%) investors as share prices of the company have shot up an impressive 39%. Even better, it looks like its impressive rally is here to stay following the release of its latest quarterly results.
Cloudflare reported its first-quarter 2025 results on May 8, and the stock price popped more than 6% the following day. The company, which is known for providing internet infrastructure solutions such as content delivery networks (CDNs) and cloud security offerings, saw a sharp increase in its revenue pipeline in recent quarters thanks to its focus on offering artificial intelligence (AI) solutions to customers.
It's AI efforts are likely the reason why Cloudflare stock shot up despite a mixed quarterly report. Let's check why investors are bullish about this cloud stock's prospects.
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AI is turning out to be a big catalyst for Cloudflare
Cloudflare's Q1 earnings remained flat year over year and were in line with Wall Street's expectations. Its revenue jumped 27% from the year-ago period to $479 million and beat the consensus estimate of $469 million. However, the terrific growth in the company's remaining performance obligations (RPOs) is probably the reason why investors were in a cheerful mood following its report.
Specifically, Cloudflare reported a big year-over-year increase of 39% in its RPO in Q1. That was substantially higher than the increase in the company's top line last quarter and was an improvement over the RPO growth it reported in the preceding quarter. Moreover, Cloudflare's RPO of $1.86 billion points toward a robust revenue pipeline as this metric refers to the total value of a company's contracts that are yet to be fulfilled.
Management said it saw a solid increase in the demand for its Workers AI platform, which explains why Cloudflare's revenue pipeline is rising at a healthy pace. Workers AI gives Cloudflare customers access to powerful hardware, including graphics processing units (GPUs) they can use to develop AI applications with the help of popular large language models (LLMs) and run AI applications closer to users for faster performance and low latency.
So, Cloudflare provides a cost-effective method for users to train and deploy AI applications since they won't need to invest in costly hardware such as GPUs. Customers can simply rent hardware from Cloudflare, saving them from the pain of investing huge sums upfront in AI hardware and also avoiding overheads related to operating such hardware. Also, the pay-as-you-go model ensures that customers can increase or decrease their usage of Cloudflare's serverless GPUs based on their requirements.
The flexibility and advantage offered by Workers AI explain why there was a massive year-over-year increase of 4,000% in inference requests on its network. The demand for serverless GPUs that Cloudflare offers customers is set to grow at a remarkable pace. According to one estimate, the serverless architecture market could jump sixfold between 2022 and 2031, generating over $50 billion in annual revenue at the end of the forecast period.
So, there is a good chance that Cloudflare's revenue pipeline will continue to improve in the long run, and that could translate into faster growth for the company.
The company's accelerating growth is likely to result in more upside
Cloudflare's earnings didn't grow in the previous quarter due to the investments that it is making in AI hardware to set itself up for long-term growth. However, analysts expect a big jump in its bottom line following an estimated increase of 6% in Cloudflare's earnings this year to $0.80 per share. This is evident from the chart below.
Data by YCharts.
But then, it won't be surprising to see Cloudflare's earnings growing at a much faster pace, considering the rate at which its revenue pipeline is improving and the size of the end-market opportunity in serverless GPUs. Investors can consider buying this AI stock right now as it has the potential to fly higher because of its improving prospects.
