Web security powerhouse Cloudflare inches closer to a breakout

Key Points

• Cloudflare may be forming a handle to a cup pattern, which could offer an early entry point above $76.07.
• Earnings have been growing at triple-digit rates, while revenue has increased in a range between 32% and 54%.
• Cloudflare recently introduced Workers AI, an open, AI inference-as-a-service platform.

If you take a close look at the Cloudflare Inc. NYSE: NET chart, you’ll notice the stock has come within striking distance of clearing a cup-shaped base with a buy point above $76.07.

After hitting a session high of $75.68 on November 21, the provider of Web security, content delivery and network services retreated slightly. It’s possible the stock will form a handle with a new buy point above $75.68.

MarketBeat’s Cloudflare earnings data show the company beating both earnings and revenue estimates. When Cloudflare reported earnings in early November, the stock advanced nearly 14%. 

Cloudflare is tracked among technology stocks, but it’s not yet part of the S&P 500 tech sector, which is tracked by the Technology Select Sector SPDR Fund NYSEARCA: XLK. 

With a market capitalization of $24.65 billion, San Francisco-based Cloudflare easily qualifies for S&P membership, but the index is already stacked with plenty of big techs, so Cloudflare will have to wait its turn.

How does enterprise software industry stack up?

But how does Cloudflare’s performance stack up against other techs, industry peers, in particular? 

Within the enterprise software sub-industry, Palantir Technologies Inc. NYSE: PLTR has been the best price performer for the month of November. Palantir is a volatile stock, and traded lower the week ended November 24 while Cloudflare posted a gain. 

Shopify Inc. NYSE: SHOP has also been a top performer within the enterprise software industry, returning 49% in November after gapping up on a better-than-expected quarterly earnings report and upbeat guidance. 

Salesforce Inc. NYSE: CRM, ServiceNow Inc. NYSE: NOW, SAP SE NYSE: SE, SnowFlake Inc. NYSE: SNOW and Datadog Inc. NASDAQ: DDOG are among the largest stocks in an industry that boasts several strong companies.

Triple-digit earnings growth

Cloudflare’s earnings have been growing at triple-digit rates, while revenue increased between 32% and 54% in the past eight quarters. 

Despite that stellar earnings and revenue performance, Cloudflare stock has essentially been trading in a sideways range for most of this year. That’s not necessarily bad, as the stock managed to hold above a May low of $39.90. 

Economic uncertainties, particularly as they affect tech spending forecasts, may have kept a lid on the stock. 

However, given the company’s rosy guidance, investors may be more open to jumping on board. 

It’s expected now that every software platform is incorporating AI into its offering, and that’s the case with Cloudflare. 

Big plans for inference AI

In October, the company launched Workers AI, an open, AI inference-as-a-service platform. AI inference is the process of drawing conclusions based on inputs. Workers AI allows developers to run their own machine-learning models on the Cloudflare network. 

Cloudflare allows users to pay as they go, meaning no subscriptions or contracts are necessary. 

In the announcement about Workers AI, Cloudflare said, “This is just the start, and we’ve got big plans. After launch, we’ll continue to expand based on community feedback.”

In a statement with the third-quarter report, CEO Matthew Prince said, “In our third quarter, we relentlessly innovated and accelerated our efforts in AI, announcing the most complete platform to deploy fast, secure, compliant AI inference at scale with Workers AI—along with several partnerships and collaborations with the who’s who of AI.”

Prince said the company sees inference as the biggest opportunity in AI, “and inference tasks will largely be run on end devices and on connectivity clouds like Cloudflare.”

Rolling out inference-optimized GPUs

By the end of 2024, the company expects to have inference-optimized graphics processing units running in nearly every location where Cloudflare operates worldwide, within milliseconds of every Internet user.

After the earnings report, Wall Street had a mixed outlook on the stock, as you can see using MarketBeat’s Cloudflare analyst forecasts. Oppenheimer and Morgan Stanley upgraded the stock, while Piper Sandler and Royal Bank of Canada lowered their price targets.

According to Morningstar analyst Malik Ahmed Khan, writing after the third-quarter report, “We believe Cloudflare is poised for success in both the Web security and edge computing spaces.

Extensive existing customer base

Khan added that Cloudflare stands to benefit from increased cybersecurity spending. 

Already, there’s a strong installed customer base, as more than 10% of global Internet traffic goes through Cloudflare’s network, with more than one-quarter of all Web sites in the world using Cloudflare. 

“We expect cybersecurity to be increasingly relevant for firms across the globe as cyberattacks continue to increase,” Khan wrote. “However, we think Cloudflare is capable of much more than security, and we view edge computing as a major opportunity for the firm.”