Table of Contents
Reviews and deep dives already published this season:
a. Cloudflare 101
Basic Niche:
Cloudflare makes the internet fast, reliable and secure. They have a massive global Content Delivery Network (CDN) to move traffic closer to the end user, which cuts web latency. They actively assist clients in optimizing traffic, speed and consistency as well. NET doesn’t sell physical firewall hardware, but instead a virtual, cloud-native “Magic Firewall” to supplant these hardware needs.
Web application firewalls (WAFs) are for app-level security.
Magic Firewall is for network-level security.
Magic Wide Area Network (WAN) is Magic Firewall’s partner in crime; it connects networks while Magic Firewall protects them.
Workers Platform & AI Tools:
Workers Platform is its serverless (so fully managed by Cloudflare) product suite for millions of developers to build, maintain, secure and deploy applications. This enables caching of content and apps across Cloudflare’s global network for faster delivery. It also allows developers to access models and GenAI tools (like sentiment analysis) to build and customize apps hosted by Cloudflare’s network.
Workers AI pairs seamlessly with its “Vectorize.” Vectorize offers a style of data querying that allows for visualization of patterns.
Another key example of Cloudflare’s GenAI tools is its R2 product. This allows cloud workloads and data to freely move among public clouds with no tax. This is key in a multi-cloud world where very few want to rely on a single vendor anymore. Simply put, models are voracious users of data and that data is routinely hosted in many clouds. That's where R2 comes in handy.
Cloudflare AI is its overarching suite of AI tools, which includes the developer AI tools in Workers, among others.
Hyperdrive is a notable product within the Workers Platform. This allows any legacy database to plug into NET’s global CDN. It makes NET an easier migration partner as it helps customers embrace next-gen databases, cloud migrations and GenAI.
AI Crawl Control helps companies safeguard their proprietary data from impermissible AI chatbot access and set permission rules.
Browser Isolation is Net’s managed service for providing users with a purely secluded environment to search and scrape the web. This will be an increasingly important tool for its GenAI inference products that are now building steam. Inference is where Cloudflare expects to realize the bulk of GenAI’s financial value. Models are trained once and periodically updated with new data. After that, the value of those models lies in their ability to connect dots and drive insights (or inference). That’s where Cloudflare thrives.
Zero Trust & More on Network Security:
Cloudflare also offers its Zero Trust Network Access (ZTNA) program. This directly competes with Zscaler. Zero trust means that a user or device must be constantly verified (or never trusted). Cloudflare does this in a seamless manner that minimizes user friction by only creating that friction when necessary. It considers device type, location, usage patterns (or signatures) and other contextual clues to better authorize permission requests. This way, it knows when to block those requests or when to require more information. It then deploys a minimal privilege approach to ensure only the necessary permissions are granted to workers. Nothing more, nothing less. Zero Trust ensures an adversary can’t breach the most vulnerable part of a tech stack and move freely throughout it thereafter.
Cloud Access Security Broker (CASB) is a security tool to provide firms with a bird's-eye view of application usage. This has both security and performance optimization implications. It hosts and secures client data and uncovers suspicious activity or deviations in typical usage patterns to flag threats. It plugs into NET’s Secure Web Gateway (SWG), which is essentially a digital security guard ensuring protection of a firm’s secure network and assets from the open internet. It ties closely to NET’s data loss prevention (DLP) and URL filtering tools.
Secure Access Service Edge (SASE) is a term for how Cloudflare conjoins web performance like SWG, Magic WAN with security use cases like DLP, Magic Firewall, email security and broad threat intelligence capabilities. This drives vendor consolidation, controls costs and augments performance. Cloudflare One is its overarching product bundle subscription combining this suite.
It offers Distributed Denial of Service (DDoS) attack protection to augment its security capabilities. This form of hacking aims to inundate and overwhelm networks with traffic. NET prevents this activity through a product called Magic Transit and boasts higher success rates, scalability and cost efficiency with it vs. alternatives. They think they’re one of one in terms of handling massive traffic spikes without ballooning costs or issues. While alternatives route separate networks for DDOS-specific functions, sacrificing interoperability, Cloudflare provides non-siloed service.
b. Key Points
AI is accelerating virtually every facet of this business.
Signed its largest annual contract value deal ever.
The Workers Platform is up to 4.5M developers, growing 50% Y/Y.
c. Demand
Cloudflare beat revenue estimates by 3.9% & beat guidance by 4.3%. NET’s 30.2% 2-year revenue compounded annual growth rate (CAGR) compares to 29.4% Q/Q & 28.9% 2 quarters ago.
d. Profits & Margins
Beat 75.6% GPM estimates by 20 basis points (bps; 1 basis point = 0.01%).
Beat EBIT estimates by 6.9% & beat guidance by 7.3%.
OpEx as a percent of revenue was 60% vs. 63% Y/Y. Leverage came from R&D as well as sales & marketing.
Operating income rose by 33% Y/Y.
Headcount rose by 21% Y/Y.
Beat $0.27 estimates & identical guidance by $0.01 each.
Beat FCF estimates by 3.5%. Network CapEx was 13% of revenue during Q4 and will be around 13.5% of revenue for 2026.
The same harmless trend impacting GPM in recent quarters hit that margin during Q4. Paid traffic increased as a percentage of total traffic, which means more overall expenses allocated in cost of goods sold rather than sales and marketing. There is no material impact on EBIT or net income, as it’s just reshuffling where expenses are realized.
e. Balance Sheet
$4.1B in cash & equivalents.
$3.3B in convertible notes.
No traditional debt.
2.1% Y/Y share dilution.
f. Guidance & Valuation
Cloudflare’s annual revenue guidance beat estimates by 2%. Annual EBIT guidance was 8% light and annual $1.115 EPS guidance missed by $0.065. They are “comfortable with consensus FCF estimates for 2026." Q1 guidance was similarly strong for demand and light for profits.
NET trades for 160x forward EPS. EPS is expected to compound at a 25% clip for the next two years. This is now the most expensive name in the coverage network following Palantir’s decline.
g. Call & Release
Lean, Mean, Go-to-Market Machine:
I remember it like it was yesterday. About two years ago, Cloudflare Founder Matthew Prince ripped into his company’s sales team and go-to-market processes. He said this part of the company was bloated, inefficient and holding back the success of its world-class product suite. They had great tech. They did not sell it well enough. Prince vowed to change that. Through hiring Mark Anderson, overhauling its sales roster, hiring more selectively and leaning into channel partnerships, go-to-market has blossomed into a company strength to match the rest of the organization.
Q4 provided a boatload of new evidence beyond the revenue beat. $1M+ customers rose 55% Y/Y to 961 (record for quarterly net new adds) while it signed its largest annual contract value (ACV) deal ever ($42.5M/year). Overall ACV grew faster than it has in 4 years and the forward-looking demand pipeline was called strong. Despite accelerating new sales hires, sales productivity still rose Y/Y for the 8th straight report and is now at new all-time highs with plenty more room for progress.
“Momentum today is the cumulative result of two years of effort to retool our go-to-market team to match our already world-class engineering and product teams… We've long been a place where the best engineers came to earn their stripes… Cloudflare is now a destination where the best salespeople now know they can come and win. ” – Founder/CEO Matthew Prince
NET also continues to enjoy more channel partner momentum. This is coming from better go-to-market, but also a larger product suite and integration ecosystem. That is driving more complexity for system integrators and other re-sellers, which is actually a good thing for them. They get paid more when the professional services needed to onboard a product are more cumbersome.
Some wins:
NET won a 2-year $85M contract with one leading AI native and a 1-year $5.4M contract with another. Both picked it over competitive bids from most of the hyperscalers.
Expanded its contract with a Fortune 100 tech company with a new 3-year $5.8M deal. NET won the business despite being more expensive than the competing bids.
Won a 2-year $45M contract from a hyperscaler due to NET's ability to “fill critical gaps in their model.”
Won a 3.5-year $6.6M deal with a global consumer goods company despite the existing vendor offering aggressive discounts to keep them. NET replaced all three existing vendors.
Expanded with a large U.S. government agency after the customer was “shook” by how simple and powerful NET’s solutions were. The AI Crawl Control offering helped solve a lot of data leakage and scraping issues the firm was having.
AI is an Accelerant – Original Core Business:
“Vendors are once again being sorted between nice-to-haves and must-haves. quantitative metrics and qualitative wins this quarter again demonstrate that Cloudflare is squarely in the must-have bucket as a non-negotiable linchpin of the modern technology stack.” – Founder/CEO Matthew Prince
Most of the earnings call was spent working through all of the ways AI and agentic work will accelerate Cloudflare’s growth engine and make it an even more indispensable ecosystem participant. And this isn’t just true for the new products it's building but for its core application services as well. Demand for web orchestration, monitoring and optimization talents continues to accelerate because of AI. At the end of the day, Agents are interacting with apps and data to collect information and string together autonomous workflows. As Prince put it, if humans are reading through 2-3 pages to do this, AI bots are going through hundreds. That makes it clear why this new technology is so profoundly positive for this part of NET’s growth – more page requests = more demand.
This is the nice part of controlling 20% of global web traffic. That massive scale means agents must frequently use and interact with its platform to access the lucrative insight they need. It means NET can have a big say in what the future of agentic work looks like and how it will command its piece of that pie.
"The shift toward AI and agents represents a fundamental re-platforming of the Internet that's driving demand across Cloudflare's services. If agents are the new users of the web, Cloudflare is the platform they run on and the network they pass through.” – Founder/CEO Matthew Prince
AI is an Accelerant – Security Demand & Monetization Help:
Serving as a vital conduit between agents and the context they need to power work is exciting. At the same time, it also creates new data leakage vulnerabilities as companies grapple with how to embrace this new source of traffic without agents stealing their proprietary insight. That is directly supporting demand for its network security platform.
The desire to protect content really started with publishers like the New York Times and Fox News, but has since extended to many more industries like equity research.
“The reaction from the content creator side has been just overwhelmingly positive.” – Founder/CEO Matthew Prince
NET is also leveraging its web traffic and security market positions to ensure it’s helping businesses find new ways to monetize amid the agentic explosion. Agents don’t click on ads and they don’t purchase paid subscriptions either. Companies will need to find novel methods to get paid for the content and information they’re providing the world, as consumption of that content moves from human-centric to agent-centric. They need to make sure they’re paid as they help AI generate accurate outputs. NET is candidly not exactly sure how this will work, but it is determined to be an ally in the new monetization models that stem from agentic work. If NET is the company facilitating agentic traffic, protecting the exchange of data AND letting companies figure out how to keep making money, they should be irreplaceable as AI proliferates. That’s their plan.
As part of this plan, leadership is dedicated to making sure old foundations and systems can rapidly and seamlessly migrate to new systems with little disruption. They’re building these pipelines with malleability in mind, knowing they don’t yet know exactly how agentic will take shape.
“We’re not going to require you to have to go in and rebuild things. We want to make it one-click simple where as soon as we figure out what really works, you push a button, and whatever you had as your old marketplace gets to support whatever agents you’re providing in the future.” – Founder/CEO Matthew Prince
Interestingly, AI companies are happy to work with NET on secure access to content. They know they’ll need to pay and behave if they want this valuable flow of information from ecosystem providers to stay healthy. Anthropic and OpenAI can’t give good responses to questions if they can’t access high-quality sources. And finally, while MSFT and AMZN are building competing offerings, Prince thinks the world wants a cloud and content agnostic provider like NET to fill the void and thinks they’ll be the most popular option.
NET bought a company called Human Native as a way to accelerate formulation of these new monetization ideas.
NET plans to work closely with companies like Shopify and Visa to form these end-to-end systems for secure content access and usage.
AI is an Accelerant – Developer Usage:
NET’s Workers Developer Platform is thriving amid the AI and vibe coding booms. Most of the apps being conversationally built are done so using Cloudflare’s tools and/or network. This ensures NET wins if developers choose to build apps on its platform or if they use its platform to provide foundational support for other applications. Workers Platform is winning because it gets customers "from idea to application faster than anywhere else” and in ways that are more cost efficient. Other integrated tools like Sandboxes help limit any damage from agents misbehaving or failing while, generally speaking, users enjoy all needed tools in one place.
NET’s business model is helping them win too. Cloudflare isn’t in the business of renting out access to large swaths of compute like hyperscalers. It has no massive minimum commitments required and instead works tirelessly to make sure the compute customers do end up using is as optimized and cheap as possible. Not only is that popular for massively scaled applications, but it’s very popular for developers on tight budgets.
Workers Platform is up to 4.5M active developers, representing 50% Y/Y growth.
It’s worth noting that NET has carved out this enviable AI position without needing to spend hundreds of billions on CapEx to get it.
Purchased Astra as another vibe coding platform that was becoming popular among builders.
“When the cost of generating code drops to near zero, the volume of new applications explodes.” – Founder/CEO Matthew Prince
Prince’s Thoughts on Software Sentiment:
“I think there's kind of oftentimes in the market strong reactions in both directions. I don't think every SaaS company is dead. I do see a rate of entrepreneurs and developers building new disruptive ways of taking on incumbents that I've never seen before… I know that AI is putting pressure on some companies that are out there. It's not putting pressure on Cloudflare. We are seeing it as nothing but a tailwind.” – CEO Matthew Prince
h. Take
This doesn’t need to be long. Most of you know what I’m going to say. NET is one of the best companies on the planet. I’m still not willing to pay a PEG ratio north of 6x or anything remotely close to that level. That's the highest growth multiple in my coverage universe and twice the price of other very expensive names like CrowdStrike. For this reason and this reason alone, despite my deep admiration for the company and their leader, I have no interest in owning shares.
