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Cloudflare, Inc.

NET

Wall street consensus:

### Consensus View on Cloudflare, Inc. (NET)

**Aggregate Performance Assessment:**

Cloudflare demonstrated a robust performance in the fourth quarter of 2023, with revenue growth surpassing investor expectations, maintaining above 32% year-over-year. The exceptional quarter was highlighted by a +40% year-over-year increase in new ACV bookings, the highest growth rate since 2021. The FY24 revenue outlook somewhat exceeded consensus expectations. Despite the optimistic projections, particularly around Edge AI opportunities, concerns about the premium valuation of Cloudflare's stock persist. The stock is trading at 15X EV/CY25 sales, with an expected over 30% revenue CAGR over the next five years.

**Harmonized Key Topics Analysis:**

- **Bookings Acceleration:** Cloudflare's meaningful acceleration in cRPO bookings is a significant indicator of its growing market presence and suggests a potential for sustained future revenue growth. This acceleration outlines Cloudflare's competitive strength and market appeal.

- **Large Deal Strengths:** The company's ability to secure large deals, exemplified by a notable 3-year $33MM win, illustrates Cloudflare's solid competitive position and capability to attract meaningful business contracts. This strength in securing large contracts is pivotal for its sustained growth and market penetration.

- **Edge AI Opportunities:** The emphasis on Edge AI, enhanced by an increase in Workers AI service adoption, suggests a promising revenue upside from these new technological avenues. While these opportunities are still in their early stages, they represent significant growth prospects for Cloudflare.

**Comprehensive Future Investment Considerations:**

1. **Revenue Forecast Accuracy:** There's a consensus that investors should meticulously monitor Cloudflare's revenue forecasts. The conservative guidance, juxtaposed with the marked booking acceleration, hints at a possibility for future upward revisions.

2. **Expansion in Edge AI and Workers Platform:** The adoption rates and consequent financial impact of Cloudflare's newly introduced AI services and the Workers platform are crucial for evaluating the company's future growth trajectory. These areas are flagged as pivotal for Cloudflare's expansion and revenue scaling.

3. **Sales Strategy and Securing of Large Deals:** The continuous capability of Cloudflare to secure impactful large deals is identified as a critical focus area for investors, influencing direct revenue streams and reinforcing Cloudflare's market position.

4. **Reevaluation of Market Valuation:** Given Cloudflare's premium trading valuation, any adjustments in market valuation—stemming from its future performance or broader market changes—should be carefully considered by investors. The valuation aspect remains a concern against the backdrop of otherwise strong growth prospects.

**Consensus Summary:**

The consensus among sell-side reports suggests optimism about Cloudflare's future, underpinned by strong Q4 performance, exceptional bookings growth, and promising avenues in Edge AI and large contracts. However, this positive outlook is tempered by valuation concerns, emphasizing a need for a balanced and cautious investor approach. Monitoring revenue forecasts, expansion in technology services, sales strategies, and market valuation adjustments are paramount for future investment considerations. Overall, while Cloudflare presents significant growth opportunities, careful consideration of its premium valuation is advisable.

Ticker:

​Recent Conference Call

### Cloudflare, Inc. FQ4 2023 Earnings Call Summary

#### Insightful Quote from the CFO:
"Our fiscal prudence and strategic investments have positioned us for sustained growth amid evolving market dynamics. Our unwavering focus on operational excellence continues to yield dividends, setting the stage for an optimistic outlook." - Thomas Josef Seifert, Chief Financial Officer

#### Key Business Trends:
1. **Large Customer Growth & Diverse Revenue Streams**: Cloudflare demonstrated robust growth by adding 198 new large customers, underscoring the effectiveness of its expanded product offerings and strategic market positioning. This trend reflects Cloudflare's successful penetration into higher-value segments and its ability to diversify revenue sources beyond traditional offerings.

2. **Increasing Emphasis on Go-to-Market Efficiency**: Significant improvements in pipeline close rates, sales force productivity, and average deal sizes were reported, indicating a more disciplined and effective go-to-market strategy. The hiring of industry veteran, Mark Anderson, as part of the go-to-market team, signals a strategic move to bolster sales execution and expand Cloudflare's enterprise footprint.

3. **Investment in AI and Developer Tools**: Cloudflare outlined its strategic investments in AI, specifically highlighting the deployment of GPUs across its global network and the introduction of AI-focused developer tools like Workers AI and Vectorize. This investment caters to the burgeoning demand for AI infrastructure and positions Cloudflare as a key player in the rapidly evolving AI landscape.

#### Critical Analysts’ Questions:

1. **Enterprise Segment Growth**:
- **Question**: Analysts expressed curiosity about the factors contributing to Cloudflare's significant enterprise segment growth and the sustainability of this trend.
- **Response**: Management highlighted the effectiveness of their targeted go-to-market strategies, the appeal of Cloudflare's comprehensive product suite to large enterprises, and continued investment in salesforce development as key drivers.

2. **Guidance Conservatism**:
- **Question**: Concerns were raised regarding the conservative guidance for FY 2024 amidst Q4 outperformance.
- **Response**: The CFO cited ongoing macroeconomic uncertainties and the company's disciplined approach as the rationale, emphasizing the commitment to adaptability and fiscal responsibility.

3. **AI & Edge Computing Contribution** (Unique Question):
- **Question**: Analysts sought clarity on the expected revenue contribution from AI and edge computing services.
- **Response**: Management underscored that, while still in early stages, AI and edge computing are poised for growth, with strategic GPU investments and ecosystem development to catalyze momentum.

#### Outlook and Guidance:

- For FY 2024, Cloudflare anticipates a revenue range of $1.648 billion to $1.652 billion, indicating a growth rate reflective of both the company's cautious optimism in light of macroeconomic conditions and confidence in sustained demand for its diversified solutions. Operating income forecasts suggest a focus on balancing growth with profitability. Notably, the guidance incorporates considerations for evolving business demands and margin implications, presenting

Key Questions to follow

Given the thematic investment tag of Artificial Intelligence, Cloud Computing, and Edge Computing in the context of Cloudflare Inc. (NET), the summary of the sell-side research report you provided, here are three insightful questions focusing on the company's potential for future growth:

1. **Expansion and Monetization of Edge AI Services:**
Cloudflare has demonstrated an upbeat performance in its latest quarter, with a notable emphasis on Edge AI opportunities and the adoption of its Workers AI service. Considering the early stage of these technologies and the current upbeat market sentiment towards AI, how is Cloudflare planning to further expand its Edge AI capabilities? Moreover, what strategies are in place to ensure the effective monetization of these services, particularly as they gain traction among users, to contribute significantly to the company's overall revenue growth?

2. **Balancing Premium Valuation with Growth Investments:**
Despite Cloudflare's impressive growth rates, the stock currently trades at a premium valuation (15X EV/CY25 sales) due in part to its exceeding 30% revenue CAGR forecast over the next five years. How does Cloudflare plan to balance this premium valuation with the necessary investments in AI, cloud, and edge computing technologies to maintain or even accelerate its growth? Specifically, what measures is the company considering to ensure that its growth in areas like AI and edge computing justifies its valuation, thereby attracting and retaining investor confidence?

3. **Navigating Competitive Challenges in the Adoption of Workers Platform and Edge AI:**
The report indicates a growing interest and adoption of Cloudflare's Workers platform and Edge AI services. As these services are in the early stages, the competitive landscape is likely to evolve rapidly. What strategies is Cloudflare implementing to navigate these competitive challenges, especially as more players enter the edge AI and cloud computing spaces? Furthermore, how does Cloudflare plan to leverage its strengths in securing large deals to differentiate its offerings in a potentially crowded market, thereby ensuring its sustained growth and market presence in these advanced technology domains?

AI Q&A
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