Cloudflare Is a Solid Buy for 2025

Key Points

• Cloudflare sustains momentum and is on track to quadruple earnings in the next four years, which is a tailwind for the market. 
• Macroeconomic tailwinds are expected to form in the back half of 2025; the forecasts for Cloudflare are cautious. 
• Cyber attacks are rising at a hypergrowth pace and are unexpected to stop, driving demand for this cyber security stock. 

Cloudflare’s NYSE: NET biggest problem in 2024 is its stock price valuation. Trading well over 100X earnings, the market is pricing in significant growth, implying a 4X gain in earnings, but the concerns will disappear in 2025. The company continues to build leverage despite macroeconomic headwinds, and headwinds are expected to revert to tailwinds in 2025, so it will likely grow earnings faster than expected over the longer term.

As it is, the analysts' consensus outlook is robust and forecasts adjusted EPS to more than quadruple in the next four years.  

It may not be until later in the year. Still, falling interest rates and business-friendly presidential policies will reduce the cost of borrowing and ease regulation, clearing the path for business investment. That will result in expanding economic activity across industries and verticals, driving demand for leading business services stocks like Cloudflare.

Because business increasingly depends on websites, eCommerce, and the cloud, Cloudflare is perfectly positioned to capture it. 

Cloudflare Sustains Traction in 2024: Outlook Brightens

Cloudflare is sustaining high-double-digit growth in the upper 20% range in 2024. The Q3 results include a 28.2% topline growth that outpaced the consensus by 140 basis points on improved client count and penetration. The company acquired 219 new large clients during the quarter, up 28% year over year, and now has 35% of the Fortune 500 under its umbrella.

The net retention rate declined but remained strong at 110%, showing a solid increase in revenue from existing customers.  

The margin news is good, with margins trending above targets and improving incrementally on a YOY basis. The company continues to post GAAP losses, but the losses are shrinking. It is on track for GAAP profitability, and the adjusted margins are positive, sustaining free cash flow growth. The adjusted income margin is 15%, and the free cash flow is strong. The FCF grew by 30% to 11% of revenue and is expected to remain strong in Q4 and 2025. 

The guidance provides a tailwind for the market in 2024. The market reaction was unenthusiastic, but guidance calls for sustained growth in the mid-20% range in Q4 and the full-year total to outpace the consensus targets. The critical details include the earnings outlook, which also outpaced the consensus targets and is likely cautious.

Cyber attacks are rising at an alarming rate, up an estimated 75% in Q3, with the time and cost of remediation increasing along with it. Businesses need the Internet and Cloudflare to help keep their websites operational and safe. 

Analysts Support Cloudflare’s Price, but the Upside is Limited in 2024 

Analysts support Cloudflare and show a bullish bias in the data. However, even with sentient firming, the stock is pegged at Hold, and the upside is limited. The consensus target assumes the stock is fairly valued in the low $90s, and most recent revisions suggest the top is near $115.

The high-end range is $135, but that target is an outlier set by Needham & Company over the summer. Likewise, the institutions support the market but provide limited upside. The institutions bought on balance in 2024, including every quarter of the year, but the total activity diminished as the share price advanced. 

The technical action is bullish, showing support growing in the low-end range. The market could push the price to the $115 level but may have difficulty moving any higher. That level coincides with a market top set in 2022 and will provide strong resistance. A move above that level is possible in 2024 but more likely in 2025 after subsequent quarters of strength. The critical level for support is the 150-week EMA, which has provided solid support in 2024. A move below that level could take this stock to the low-end range near $60.