Zinger Key Points
- Cloudflare’s Act III products could grow ARR from $80M to $1.3B by 2030, driven by AI inference and developer tools.
- Capex up 40% to meet AI demand as Cloudflare ramps global compute and doubles Act III contract value growth.
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Goldman Sachs analyst Gabriela Borges maintained a Buy rating on Cloudflare, Inc NET on Wednesday with a price target of $161.
Borges remarked that the key debates about Cloudflare today are how big the opportunity in AI inference is and how quickly this opportunity will ramp up.
At the time of the analyst’s upgrade on January 2, he estimated that Act III products (developer tools, compute, and storage for both classic compute and AI-enabled compute) were $80 million in ARR in 2024 and introduced a scenario in which ARR grows to $1.3 billion in 2030 (a 60% CAGR).
Also Read: Cloudflare Drives Analyst Optimism With ‘Speedboat’ AI Initiatives, Sales Productivity Gains
The CAGR is intended as a starting point estimate given the number of unknowns in sizing the AI inference TAM and Cloudflare’s share within it. That said, one key indicator in Cloudflare’s fourth-quarter 2024 earnings call directionally supports this ramp in the near term: capex.
Specifically, Cloudflare guided capex to be 12-13% of revenue, or up ~40%, citing increased investment in its GPU rollout to support AI inference demand.
At its Analyst Day, Cloudflare further disclosed that Act III’s annual contract value (ACV) was up 76%, marking acceleration, and plans to double its capacity for global computing this year.
Borges detailed limitations to using a capex-to-revenue ratio to forecast revenue, which makes precise forecasting challenging. Nonetheless, coupled with the analyst’s broader fieldwork, Cloudflare is on track to double Act III ARR in 2025.
Borges noted that Cloudflare is still in the first or second stage of this product cycle and that its technical differentiators will allow it to capture a meaningful share in this new profit pool.
Borges projected fiscal 2025 revenue of $2.09 billion and EPS of $0.81.
On Tuesday, BofA Securities analyst Madeline Brooks upgraded Cloudflare to Buy, raising the price target to $160, driven by AI-as-a-Service and network security growth.
Price Action: NET stock closed lower by 4.98% to $121.15 on Wednesday.
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