The AI market is expanding, with various companies entering the scene. Among these, Cloudflare (NYSE: NET) stands out due to its extensive data centre network, a crucial asset for companies dealing with AI workloads. But will Cloudflare be a top AI stock in 2024?
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Cloudflare’s Journey and Acquisitions
Founded in July 2009 by Matthew Prince, Lee Holloway, and Michelle Zatlyn, Cloudflare initially operated as a content delivery network, optimising information delivery to end users across the globe. The company went public on the New York Stock Exchange under the ticker NET in September 2019. Over the years, it has strategically expanded its services through acquisitions, including StopTheHacker, CryptoSeal, Neumob, and others, positioning itself as a top AI stock for the future.
Cloudflare’s primary function as a CDN involved placing data close to end users worldwide, significantly reducing latency. This network, spanning over 300 cities and 120 countries, has positioned Cloudflare as a leading cyber security provider. Hosting on it allows for centralised security solutions, offering superior protection and making it an attractive choice.
Beyond CDN and cybersecurity, the company’s data centres also serve as a valuable resource for generative AI. By running generative AI tasks on its networks, Cloudflare enhances model efficiency while ensuring top-tier cybersecurity.
Cloudflare Stands Out as a Top AI Stock with Unrivalled Developer Services
The company’s management envisions its value proposition for developers, marked by unparalleled speed and cloud-neutral technology, as integral to the AI value chain. It is actively pursuing this opportunity, as evident in its recent introduction of Workers AI. This service empowers businesses to construct AI applications and execute machine learning models on Cloudflare’s network.
Boosted by Nvidia’s GPUs and complemented by other Cloudflare products like R2 (object storage) and Vectorize (vector database), Workers AI positions the company at the forefront of AI innovation.
While these innovations may take years to translate into substantial revenue streams and make it a top AI stock, the company remains optimistic. CEO Matthew Prince asserts that it is the preferred cloud provider for leading AI companies and envisions the company as uniquely poised to ascend as a leader in AI inferencing—a market representing the most significant opportunity in AI.
Cloudflare Stock’s Journey
Cloudflare, a leading software company, has witnessed remarkable stock performance since its IPO in September 2019 at $15 per share. With an impressive growth of approximately 420%, the stock reached a peak of $86.91 in November 2021, boasting a market capitalization exceeding $27 billion as of January 2022. This made it one of the top AI stocks to invest in during that period.
The company’s financials reflect its robust growth trajectory, with revenue increasing from $287 million in 2019 to $431 million in 2020, representing a substantial 50% growth. Furthermore, Cloudflare expanded its customer base by 58%, from over 2.6 million in 2019 to more than 4.1 million in 2020.
The number of large customers, generating over $100,000 in annualised revenue, also grew by 51%. The company’s success is not only evident in financial metrics but also in product diversification and competitive strengths. The company introduced innovative solutions like edge computing and zero-trust networking, leveraging its global network of over 200 data centres, proprietary technology, strong brand recognition, and loyal customer base.
Investing in Cloud Computing
Cloudflare provides investors with an avenue into cloud computing, a sector projected to witness substantial growth over the next decade. However, the question remains: Has Cloudflare become a top AI stock? While it has garnered significant attention, boasting a 32% year-over-year revenue increase and acquiring over 30,000 customers in the past year, its stock is notably high-valued. With a price-to-sales ratio of 21, it stands at a premium compared to many tech peers. However, this premium valuation prompts investors to question whether it is a top AI stock to invest in.
Cloudflare’s relevance in the generative AI space was underscored in its recent earnings call. CEO Matthew Prince revealed that OpenAI, a prominent generative AI company, had signed a substantial deal with Cloudflare. Originally beginning as a gateway DNS opportunity, the deal evolved as OpenAI’s AI-generated content witnessed unprecedented adoption rates.
The Cloudflare CEO highlighted the inadequacy of Microsoft’s Azure cloud platform in handling the surge in demand for OpenAI’s services. OpenAI turned to the company for solutions, including its content delivery network, bot management, and distributed denial of service capabilities. With approximately 80% of websites relying on content delivery networks utilising Cloudflare, the company emerged as a beneficiary in the generative AI landscape. Its critical infrastructure played a crucial role in powering and securing the internet for various AI applications.
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Analysing Future Prospects: Will Cloudflare Be a Top AI Stock?
Cloudflare’s long-term model anticipates an operating margin of 20% or more. However, its current valuation, at 61 times forward earnings based on three-year projections, raises concerns about the stock’s potential as a top AI stock. Despite its positive business outlook, the market’s already high expectations may limit stock growth.
While the company has solidified its position as a top AI stock, potential investors must carefully evaluate its current valuation and weigh the high expectations against future growth prospects. The company’s success in optimising expenses and achieving substantial growth will be critical to justifying its premium valuation in the competitive AI landscape.
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