Predicted Massive Potential for This Stock as Artificial Intelligence Trade Evolves in 2025, Suggests Financial Experts on Wall Street
Jim Tierney at AllianceBernstein recently spoke to Yahoo Finance, stating that companies like Nvidia were the initial stage of the artificial intelligence (AI) trade. He believes the next phase will focus on cloud computing and software firms that utilize AI chips to offer services to their clients. Tierney anticipates this phase to gain momentum in 2025.
Numerous companies may reap benefits as this trend evolves, but Cloudflare (NET 1.95%) might be an investment many miss out on due to scant media coverage compared to the so-called "Magnificent Seven" businesses. However, Hamza Fodderwala and Keith Weiss at Morgan Stanley recently upgraded the stock and raised the bull-case target price to $175 per share, suggesting a substantial 55% increase from the current price of $113 in 2025.
Here's what investors need to know about this cloud infrastructure stock.
Developers rank Cloudflare as the 4th best cloud platform behind Amazon, Microsoft, and Google
Cloudflare is a cloud computing company that provides application, network, and security services. Its platform accelerates and safeguards IT infrastructure across on-premises, cloud, and hybrid environments. Additionally, Cloudflare has a developer platform that enables users to create and deploy applications on its network, such as AI applications.
The company boasts two competitive advantages: speed and scale. To begin with, it runs the fastest cloud network in the world, managing about 20% of all internet traffic. This lightning-fast speed has enabled Cloudflare to establish market leadership in content delivery and edge development platforms. Moreover, its extensive network is ideal for AI companies due to its speed.
Secondly, scale offers Cloudflare insight into performance issues and security threats across the web. This data aids in routing decisions and threat detection, fostering a "network effect" that improves network performance and security continually. As a result, Cloudflare has made significant strides in certain cybersecurity verticals, including email security and zero-trust network access.
In summary, Cloudflare has a strong presence in the application, network, and security services markets. In fact, a survey of 46,000 developers positioned Cloudflare as the fourth-most popular cloud platform behind Amazon, Microsoft, and Google. Furthermore, 45% of Fortune 500 companies are Cloudflare clients.
The company forecasts its addressable market across these three product categories to be $176 billion in 2024, but management anticipates this figure will reach $222 billion by 2027.
Cloudflare powers 80% of the top 50 generative AI products
Cloudflare reported impressive third-quarter financial results, surpassing both revenue and earnings estimates. Its customer base expanded by 22%, and the average existing customer spent 10% more. Consequently, revenue soared 28% to $430 million, while non-GAAP net income grew 25% to $0.20 per diluted share. Revenue guidance for the fourth quarter is set at 25% growth.
Notably, Cloudflare ranked number 14 on the 2024 Fortune Future 50 list, a report produced in collaboration with Boston Consulting Group, that assigns rankings based on companies' long-term growth potential. Cloudflare's appearance on this list can be attributed to its popularity among AI startups. In fact, approximately 80% of the top 50 generative AI web products incorporate its network.
Moreover, Cloudflare has a potentially crucial partnership with Apple. According to Morgan Stanley, the company plays a supporting role in Apple Intelligence by encrypting AI queries on hundreds of millions of devices. If Apple Intelligence becomes a significant revenue source for Apple, it could potentially become a substantial income source for Cloudflare as well.
In the long run, Wall Street predicts Cloudflare's adjusted earnings will grow at 36% annually through 2027. This suggests the current valuation of 160 times adjusted earnings might be on the pricey side. However, investors comfortable paying a premium for what promises to be a volatile stock have the option to purchase a few shares. Alternatively, waiting for a price decrease of at least 15% might be a more cautious approach.
Investors seeking opportunities in the AI and cloud computing sectors might find interest in Cloudflare, as its platform is used by 80% of the top 50 generative AI products. According to Morgan Stanley, Cloudflare's partnership with Apple in encrypting AI queries on millions of devices could potentially contribute to significant revenue for the company.
As Cloudflare continues to make strides in the application, network, and security services markets, and as its addressable market is anticipated to reach $222 billion by 2027, interested investors should consider the current valuation of 160 times adjusted earnings. While this may seem high, those comfortable with a volatile stock can choose to invest a few shares, or they may opt to wait for a price decrease of at least 15% for a more cautious entry into this promising finance opportunity.
