The rapidly expanding list of companies venturing into artificial intelligence (AI) includes various players, some with deep ties to AI, while others maintain a peripheral connection. A prominent name in this mix is Cloudflare (NYSE: NET). Known for its extensive data center network, Cloudflare is positioned to be a valuable resource for numerous companies engaged in AI-related activities. But the critical question is whether Cloudflare represents a sound investment in 2024.
Cloudflare Diverse Offerings
Originally a content delivery network (CDN), Cloudflare’s primary function was to facilitate faster internet content delivery. By establishing data centers in over 300 cities across 120 countries, Cloudflare significantly reduces the data transmission time, enhancing user experience globally.
Beyond content delivery, Cloudflare excels in cybersecurity. By centralizing protection, it offers robust security solutions, making it an appealing choice for website hosting.
Another significant aspect of Cloudflare’s infrastructure is its suitability for generative AI applications. By running AI programs on Cloudflare’s network, businesses can leverage the proximity of data centers and benefit from state-of-the-art cybersecurity.
As a key player in cloud computing—a sector anticipated to grow substantially in the coming decade—Cloudflare stands out. However, does this position it as a wise investment choice right now?
Financial Analysis and Market Valuation
The growth trajectory is impressive, with a 32% year-over-year revenue increase and a significant rise in its customer base, including high-value clients. Despite these achievements, Cloudflare’s stock commands a high valuation.
With a price-to-sales ratio of 21 times, Cloudflare’s stock is more expensive than many of its tech counterparts. The company’s long-term goal is to achieve an operating margin of over 20%. If Cloudflare were to instantly realize this target with a 20% tax rate and maintain a 30% growth over three years, it would hypothetically generate annual earnings of $425 million. Given its current market capitalization of $26 billion, this equates to a forward price-to-earnings (P/E) ratio of 61, a steep price under current and projected conditions.
While Cloudflare might experience several successful phases in the coming years and prosper as a business, the stock price could remain stagnant due to the high expectations already factored into its valuation.
Investment Consideration
Before investing in Cloudflare, one should ponder the following:
The Motley Fool Stock Advisor analyst team, which has historically outperformed the S&P 500, did not include Cloudflare in their top 10 recommended stocks. This suggests that there may be other stocks with potentially higher returns for investors.
Final Thoughts
Cloudflare undoubtedly plays a pivotal role in the AI and cloud computing landscapes, offering diverse and essential services. However, its current stock valuation reflects a significant expectation of future growth and efficiency improvements. Investors must carefully weigh these aspects against the company’s potential to meet these high expectations when considering an investment in Cloudflare.
