Cloudflare Drives Analyst Optimism With 'Speedboat' AI Initiatives, Sales Productivity Gains

On Thursday, Goldman Sachs analyst Gabriela Borges maintained a Buy rating on Cloudflare Inc NET and lowered the price target to $161 from $183.

Cloudflare hosted an investor day on March 12 in New York, featuring presentations from CEO Matthew Prince and CFO Thomas Seifert.

Cloudflare’s latest data points highlight sales productivity milestones and details on adopting the pool of funds (PoF).

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Cloudflare noted a significant ramp in Account Executive sales productivity with TTM ACV per rep back to 2022 levels after declines through 2023 and into 2024. At the same time, the company noted a clear path to accelerating AE capacity through 2025.

Management also outlined ongoing partner initiatives across service providers, MSSPs, GSI, and distributors.

The company outlined “speedboat” initiatives to take advantage of the AI inflection point in the developer ecosystem.

Speedboats encompass aligning internal teams across sales, marketing, and product to bridge the gap in focusing on the developer persona and building a qualified pipeline.

Cloudflare aggregated a list of target accounts to collaborate on product development.

Like other security vendors exploring new pricing models to drive platform adoption, Cloudflare provided more details on its pool of funds initiative to accelerate platform adoption.

Borges estimates that pool of funds deals were ~8.5% of ACV in the fourth quarter of 2024, up from 2.5% in the fourth quarter of 2023.

PoF deals generally shift the pricing curve down in the early stages of the adoption cycle, but product adoption increases typically, resulting in higher ACV in the longer term.

The architecture enables strong internal product innovation, higher compute utilization, and a platform with all the components needed to build an AI agent.

Management highlighted the benefits of using “isolates” for the next generation of applications, which allow for much greater efficiency.

As the next generation of AI-native applications are built and Cloudflare’s Workers platform usage further scales, Cloudflare is well positioned to take share.

Cloudflare is positioned for inferencing computing. It schedules workloads where computing capacity is available, passing cost savings to users and improving internal capital efficiencies.

Cloudflare customers can achieve as much as ~7 times higher utilization on its network versus hyperscalers.

Given the company’s philosophy of investing behind demand, management expects capex as a percentage of revenue to remain consistent. Directionally, Borges noted that this implies Act III revenue growth can accelerate versus the new disclosure of 76% ACV growth in 2024.

Management described how Cloudflare noted that the development/deployment of agents was starting to unfold and how Cloudflare had products to deliver.

Borges’ industry checks suggest Cloudflare has won business with many leading AI-native applications.

Cloudflare now expects to achieve its $5 billion ARR target in 2028 (versus 2027 previously, a target the company initially introduced at the 2021 analyst day).

The new outlook implies a ~28% CAGR (2024-2028), roughly aligned with Borges and consensus estimates.

Cloudflare’s contribution margin is 42% (up from 41% a year ago), reinforcing Borges’ view that Cloudflare has a unique cost advantage from colocating with telcos, and that normalized EBIT margins can exceed 40%.

Cloudflare maintained its long-term operating model with a gross margin of 75%- 77%, an operating margin of +20%, and an FCF margin of +25%.

Borges projected fiscal 2025 revenue of $2.09 billion and EPS of 81 cents.

The price target reflects 22 times Q5-Q8 revenue (from 25 times previously) due to lower peer multiples. 22 times EV/sales implies a ~0.78 times EV/sales/growth multiple, in line with top quartile Software peers.

Price Action: NET stock is up 2.56% at $116.55 at last check Friday.

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