Bank of America Securities has upgraded its rating for Cloudflare (NET, Financial) from "underperform" to "buy," citing improvements in the company's fundamentals. The target price has been raised from $60 to $160. Prior to the U.S. stock market opening, Cloudflare's shares surged by 8% and closed with a 2.88% gain.
The analyst team, led by Madeleine Brooks, identified two key factors driving Cloudflare's accelerated growth. They noted that the company is adopting a unique approach in the artificial intelligence (AI) sector, positioning itself as a potential leader in AI as a Service (AIaaS), which is expected to become the preferred mode of AI application for enterprises.
Cloudflare is also seen as a potential "AI winner" in the software industry by offering alternatives to costly and inefficient self-built capabilities. The company is gaining momentum in network security, particularly in Secure Access Service Edge (SASE), as businesses look to modernize with software-based security solutions amid an upcoming firewall update cycle.
Brooks and her team anticipate that the strong momentum in AI development and increased market share in security could boost Cloudflare's compound annual growth rate (CAGR) to 30% by 2028, up from a previous forecast of 25% by Bank of America.
However, the analysts also highlighted risks to their outlook. Cloudflare's revenue goal of $5 billion by 2028 implies a need for accelerated growth, exceeding peers' predictions by about 400 basis points. This requires near-perfect execution in go-to-market strategies, especially among enterprise clients, which has been a relative weakness for Cloudflare compared to high-growth software peers.
Additionally, the analysts noted that the market is still in its early stages, and AI's substantial contribution to revenue might take time due to unclear pricing strategies.
