Jim Tierney op AllianceBernstein recently told Yahoo Finance that chipmakers like this Nvidia marked the first phase of the artificial intelligence (AI) business. He believes the next phase will focus on cloud computing and software companies that use AI chips to deliver services to their customers. Tierney believes this phase will kick into high gear in 2025.
Countless companies should benefit if the trend takes shape, but Cloudflare(NYSE:NET) is something that investors may overlook because it receives less media attention than the “Magnificent Seven” companies. But Hamza Fodderwala and Keith Weiss joined Morgan Stanley recently upgraded the stock and raised its bull case target price to $175 per share. From the current share price of $113, that represents a monster 55% increase by 2025.
Here’s what investors need to know about this cloud infrastructure stock.
Cloudflare is a cloud computing company that offers application, networking and security services. The platform accelerates and protects IT infrastructure in on-premises, cloud and hybrid environments. Cloudflare also has a developer platform that allows users to build and deploy applications on its network, including AI applications.
The company has two main advantages: speed and scale. Specifically, it operates the fastest cloud network in the world and handles approximately 20% of all internet traffic. Unparalleled speed has helped Cloudflare secure leadership positions in the content delivery and edge development platform markets. Speed ​​also makes the infrastructure an ideal choice for AI companies.
Likewise, the Cloudflare scale provides visibility into performance issues and security threats on the Internet. That data forms the basis for routing decisions and threat detection, creating a network effect that drives continuous improvement in network performance and security. As a result, Cloudflare has become a major player in certain cybersecurity verticals, including email security and zero trust network access.
Here’s the big picture: Cloudflare has a strong presence in the applications, networking, and security services markets. A recent survey of 46,000 developers found that Cloudflare is the fourth most popular cloud platform behind it Amazon, MicrosoftAnd Alphabet‘s Google. And CEO Matthew Prince said during a recent CNBC interview that 45% of Fortune 500 companies are Cloudflare customers.
In total, the company estimates its addressable market in these three product categories at $176 billion in 2024, but management expects this figure to reach $222 billion by 2027.
Image source: Getty Images.
Cloudflare reported solid financial results in the third quarter, exceeding expectations on the top and bottom lines. The customer base grew by 22%, the second consecutive acceleration, and the average existing customer spent 10% more. In turn, revenue rose 28% to $430 million, and non-GAAP (non-generally accepted accounting principles) net income rose 25% to $0.20 per diluted share. The company expected revenue growth of 25% in the fourth quarter.
Importantly, Cloudflare ranks No. 14 on the 2024 Fortune Future 50 list, an annual report prepared in partnership with Boston Consulting Group. The report ranks companies based on their long-term growth prospects, and one of the reasons Cloudflare ranks so high is its popularity among AI startups. Nearly 80% of the top 50 generative AI web products are network dependent.
Additionally, Cloudflare has a potentially important partnership with Apple. Specifically, the company plays a behind-the-scenes role at Apple Intelligence by encrypting AI queries on hundreds of millions of devices, according to Morgan Stanley. If Apple Intelligence becomes a material source of revenue for Apple, it could also become a material source of revenue for Cloudflare.
Wall Street estimates that Cloudflare’s adjusted profits will grow 36% annually through 2027. That makes the current valuation of 160 times adjusted earnings seem very expensive. Investors who are comfortable paying a premium for what promises to be a volatile stock can buy a few shares. But it would be wiser to wait until the price drops by at least 15%.
Consider the following before buying shares in Cloudflare:
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. Trevor Jennevine has positions at Amazon and Nvidia. The Motley Fool holds positions in and recommends Alphabet, Amazon, Apple, Cloudflare, Microsoft and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has a disclosure policy.
1 Stock With Monstrous Advantage to Buy as AI Trading Enters the Next Phase in 2025, According to Wall Street Analysts, originally published by The Motley Fool
