Cloudflare (NET 2.54%) hasn't fared as well as other cybersecurity stocks this year. It's only up 13.8% year to date, while competitors like CrowdStrike (CRWD 1.32%) and Fortinet (FTNT +0.43%) are up by 49% and 87% year to date, respectively. This gap may exist for a reason, and there is good cause to believe that Cloudflare is overvalued, even at current levels.
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Profitability remains an issue for Cloudflare
Cloudflare's first-quarter results once again showed a net operating loss, which is one of the major headwinds holding the stock back from a higher valuation. Solid growth rates matter, but when a company has been around for more than 15 years, profitability matters a lot more.
The company produced a net operating loss of $62 million. That's a higher operating loss than last year, but it also represents 9.7% of revenue, while the Q1 2025 net operating loss represented 11.1% of revenue. CrowdStrike and Fortinet are both profitable, which partially explains why those stocks have enjoyed better rallies.
Revenue is still good for Cloudflare, with total sales up 34% year over year. Like many cybersecurity companies, Cloudflare enjoys an annual recurring revenue model, which makes it easier to project future results.
Cloudflare also anticipates $2.81 billion in full-year revenue at the midpoint, which represents a 29.6% year-over-year improvement. It's a step down from the 34% growth rate in Q1, but it's also normal for growth-oriented companies to beat and raise guidance. There was no guidance for GAAP (generally accepted accounting principles) net income, indicating that profitability may remain an issue.
NYSE: NET
Key Data Points
Cloudflare's valuation is already high
The price-to-sales (P/S) ratio does not paint a pretty picture for Cloudflare. The stock trades at more than 33 times sales, which is similar to CrowdStrike's valuation and more than double Fortinet's valuation. Still, CrowdStrike delivers profits, while Cloudflare isn't at that level yet.
Cloudflare's P/S ratio doesn't leave much flexibility if revenue growth starts to decelerate in future quarters. Artificial intelligence can accelerate revenue growth rates across the cybersecurity industry, but Cloudflare's recent guidance does not suggest this scenario will play out for the company.
It would be easier to give the stock a chance if it had a lower P/S ratio. Some high-growth companies can get away with high valuations, but if they remain unprofitable for too long, more investors will start to notice and look for other investments.
Cloudflare does a good job of retaining customers and has more than 4,400 large customers, defined as any business that pays at least $100,000 per year for Cloudflare's cybersecurity solutions. Cloudflare also works with more than 40% of Fortune 500 companies.
The company has an excellent service that continues to attract leading businesses. That part is good. However, profitability concerns, guidance forecasting revenue deceleration, and a lofty P/S ratio suggest that investors can do better with other stocks.
