Vulcan Stock Research

Summary

• Sky-High Valuation vs. Fundamentals: Cloudflare’s share price (~$185) has more than doubled in the past year, trading at an estimated 30–36× sales (TTM) – about 43% above even optimistic fair value estimates. The stock’s forward P/E ~180 (on 2025–26 earnings) reflects very high growth expectations baked in. This lofty valuation leaves little margin for error, elevating downside risk if growth falters or market sentiment shifts.
• Robust Growth and Market Traction: Despite rich pricing, Cloudflare continues to deliver strong growth – Q1 2025 revenue hit $479 million (27% YoY increase) beating estimates. The firm just landed its largest customer contract ever (>$100 million, leveraging its Workers platform), and achieved the highest annual new contract value growth in 3 years, indicating solid demand and competitive traction. These wins underscore a narrow economic moat (Morningstar rates Cloudflare as having a “Narrow” moat) driven by its global network scale, developer ecosystem, and innovation in security & edge computing services.
• Improving Efficiency, Not Yet Profitable: Cloudflare’s gross margin remains high (~76%), and it has turned free cash flow positive (FCF was $52.9 M in Q1, ~11% of revenue, up from 9% a year prior). Non-GAAP operating income is rising ($56 M in Q1, 12% margin), showing a path toward profitability. However, GAAP net losses persist ($38.5 M loss in Q1 2025) due to heavy reinvestment and stock-based compensation – profit margins (TTM) are still about -5%. The challenge ahead is scaling to profitability without sacrificing growth.
• Macro Regime – Mixed Signals: The current macroeconomic backdrop is complex: Inflation has receded to ~2.4% YoY, and policy interest rates hover around multi-year highs (~5%) as the Fed balances easing price pressures with still-tight labor markets. Yield curves remain somewhat inverted, signaling caution about a potential economic slowdown. Enterprise IT spending could soften if a recession materializes, a risk for Cloudflare’s growth. On the other hand, easing inflation and any future Fed rate cuts could improve sentiment for high-growth tech stocks. We factor this regime into our scenario probabilities and risk assessments – growth optimism is tempered by credit and geopolitical caution.
• High Volatility & Investor Considerations: Cloudflare is a high-beta (β ≈ 1.85), high-volatility stock. It has swung from a 52-week low of ~$69 to a high near $196, reflecting extreme sentiment shifts. Our 10,000-trial simulation (below) shows a wide range of 12-month outcomes – underscoring that a U.S. taxable investor should demand a large expected return premium for this risk. With no dividend and rich valuations, prospective returns (especially after capital gains tax) look modest. Overall, we rate NET as a Hold at best for long-term investors at current prices, and would wait for a significant pullback into the “buy zone” (see Final Recommendation) before adding exposure.

Master Metrics Table – Cloudflare, Inc. (NET)

Metric	Value	Notes (Industry/Peers)
Share Price (07/02/2025)	$185.64	Near 52-week high; +72% YTD, +126% YoY.
Market Capitalization	$67.3 B	Large-cap growth stock (347 M shares).
Enterprise Value	$63.7 B	Minimal net debt; issued $1.75B convert in 2025.
Revenue (TTM)	$1.77 B	+27.8% YoY (TTM); 3-yr sales CAGR ~36%.
Gross Margin (Q1 2025)	75.9% GAAP	High gross margin (77.1% non-GAAP); peers ~70–80%.
Operating Margin (TTM)	-8.6% GAAP	Negative but improving (was -11% a year ago).
Net Profit Margin (TTM)	-4.6%	Still net loss (GAAP); non-GAAP ~ breakeven.
Free Cash Flow (FCF)	+$150 M (est. TTM)	FCF Yield ~0.2% (near breakeven) – positive since 2023.
EV/Sales (TTM)	≈36×	Extremely high vs. cloud-software peers (10–20× typical).
EV/EBITDA (TTM)	≈974×	Not meaningful (EBITDA ~ $65 M, just turned positive).
Forward P/E	≈180×	Based on FY2025–26 est. EPS; indicates earnings are nascent.
PEG (5-yr)	~9–10	Uses ~24% EPS growth consensus – signals steep valuation.
Beta (5-year)	1.85	Highly volatile vs. S&P 500 (peer ZS ~0.9; AKAM ~0.7).
52-Week Range	$69.26 – $196.20	Low in Oct ’24, high in Jul ’25 (△≈ +167%).
Consensus Rating	Moderate Buy (2.1/5)	Mixed analyst views: 16 Buy, 9 Hold, 1 Sell.
Consensus 12-mo Target	$161 (↓13% vs. price)	Analysts’ avg. PT is $161; range $70 (bear) to $240 (bull).
Moat & ESG	“Narrow” Moat; Carbon-Neutral Ops	Morningstar sees a Narrow moat, Very High uncertainty. Runs on 100% renewable energy; some governance risk (dual-class shares).

Investment Outlook

12-Month Outlook

Over the next year, Cloudflare’s risk/reward profile skews to the downside given its stretched valuation and macro uncertainties. In our base case (≈50% probability), the stock could move sideways to slightly down – we assume Cloudflare meets consensus growth (~25% YoY) and makes incremental profitability progress, but valuation multiples compress from extreme levels. This scenario might see the stock drift toward the mid-$100s (for instance, ~$150–$160) as investors digest slower growth law of large numbers effects and possibly higher interest rates for longer. A correction toward fair value is plausible if sentiment cools – recall that Morningstar’s updated fair value is $130, ~30% below the current price.

That said, a bullish 12-month scenario (≈25% probability) envisions continued upside momentum: if Cloudflare accelerates revenue growth >30%, wins more $100M+ deals, and macro conditions improve (e.g. Fed rate cuts boosting tech sentiment), the stock could defy valuations and break out above $200. In a euphoric case, new all-time highs (analysts’ bull case ~$240) aren’t impossible – especially given Cloudflare’s strong execution and the market’s appetite for “AI-enabled” cloud plays (Cloudflare has positioned itself in AI networking services). However, we assign a smaller weight to this outcome due to the high bar already set.

Conversely, a bearish 1-year scenario (≈25% probability) would see significant downside. If economic conditions deteriorate (enterprise IT spending pullback in a recession) or if Cloudflare hits a growth stumbling block (e.g. rising competition from hyperscalers like AWS/Azure, or slower new customer additions), the stock could drop sharply. High-multiple stocks like NET are prone to 50%+ drawdowns – indeed, a decline back to double-digit share prices (<$100) is possible in a severe risk-off scenario. Some analysts’ low-end targets in the $65–$85 range reflect this kind of bearish outcome. Importantly, Cloudflare’s volatility means a bad quarter or guidance cut could trigger an outsized sell-off as momentum reverses.

Bottom line (12M): We expect Cloudflare’s stock to be range-bound to down over the next year in our base case, with a mid-teens negative total return potential (the stock’s own volatility could amplify this). The bullish path – while not our base assumption – requires flawless execution and benign macro conditions, whereas the bearish case could materialize if any cracks appear in growth or the market turns risk-averse. Given the asymmetric risk (much farther to fall than rise), a cautious near-term stance is warranted.

2–3 Year Outlook (2026–2028)

Looking 2–3 years ahead, Cloudflare’s investment picture depends on how well it can translate top-line growth into sustainable profits – and whether today’s valuation can be “grown into.” Our base scenario over this mid-term horizon assumes Cloudflare continues a strong (but decelerating) revenue trajectory (e.g. ~20–25% annual growth) and achieves meaningful operating leverage (approaching breakeven GAAP net income by 2026). Under these conditions, we anticipate the stock could recover from any near-term correction and resume moderate growth by 2027–28, as fundamentals catch up. In other words, even if the stock stagnates or pulls back in the next year or so, by 2028 the share price could work back to the high-$100s (roughly where it stands now, or slightly higher in the $180–$200 range). This would imply a subdued annualized return (low-to-mid single digits) from today’s price – essentially treading water as earnings improve. Notably, that scenario assumes the market’s valuation multiples for high-growth tech compress to more normal levels by then, which caps upside.

In a bullish mid-term scenario, Cloudflare might exceed growth expectations or unlock new revenue streams (e.g. a breakthrough success with its Workers platform, network services for AI, or winning a major slice of enterprise security budgets). If Cloudflare maintains ~25%+ growth for 3 more years and expands its operating margin toward the high teens, the company’s earnings power in 2028 could justify a substantially higher stock price. A best-case 3-year outcome might envision Cloudflare trading well into the $200s. For instance, our bull-case model suggests a stock price around $300+ by 2028 (implying ~20% CAGR from today) if the company can approach $5B annual revenue by then with healthy profitability. This upside would require Cloudflare to continue capturing market share aggressively – potentially becoming a dominant default platform for web performance and security, fending off competitors and expanding its addressable market. It’s an optimistic scenario, but within the realm of possibility given Cloudflare’s innovation pace (the stock’s 5-year performance is +428%, showing what is achievable when growth fires on all cylinders).

On the bearish side, over 2–3 years the risks of competition and tech disruption loom larger. A mid-term bear case might see Cloudflare’s growth slip into the low teens by 2027 due to intensifying competition (e.g. Amazon and Google bundling similar services at lower cost, or a new disruptive networking technology). If revenue growth were to decelerate sharply <15% by 2026 and profit margins remain thin, the market could re-rate Cloudflare as a more “mature” slow-growth company – in which case the stock could languish well below current levels. In a bearish mid-term scenario, we could see Cloudflare trading roughly in the low-to-mid $100s even by 2028 (or worse if a recession hits earnings). That would mean a poor outcome for new investors at $185, with negative annualized returns. Long-term holders would need to decide if the company’s moat and growth engine are truly broken or if it’s a temporary setback. It’s worth noting that Cloudflare’s high ownership by institutions (≈78% of float) could exacerbate a downcycle if sentiment changes, as many momentum funds might rush for the exits.

Bottom line (2–3Y): The mid-term outlook balances Cloudflare’s immense growth opportunities against the reality of a richly priced stock that might “grow into” rather than appreciate substantially from, its valuation. We expect moderate stock performance in the base case (roughly flat-to-modest gains over 3 years). Investors with a 3-year horizon should be prepared for elevated volatility on the path and ensure they have strong conviction in Cloudflare’s competitive edge, as the market will likely reassess this stock quarter by quarter based on its execution and the macro backdrop.

5+ Year Outlook

Over a 5-year plus horizon, the bullish vision for Cloudflare is compelling – but comes with high uncertainty. In an optimistic long-run scenario, Cloudflare could evolve into a much larger platform, perhaps a de facto infrastructure layer of the Internet alongside the big cloud providers. The company itself often speaks of a huge addressable market (network security, application delivery, edge computing, etc.), and if it captures a significant portion, we project annual revenues approaching $8–10 billion by 2030 (which would require sustaining ~20% CAGR or higher for 5+ years). Under such a scenario, assuming Cloudflare achieves mature operating margins in the 20%+ range (comparable to other software infrastructure leaders) and continues innovating, the stock’s fair value could vastly exceed today’s price. Our bull scenario DCF indicates a potential share price well above $400–500 in 5+ years if all goes right – essentially Cloudflare would be several times larger and valued akin to an essential digital utility. This would reward today’s investors with multi-bagger returns. However, this outcome hinges on exceptional execution and perhaps a supportive economic environment (low interest rates, robust IT spending) throughout the period.

The base-case 5-year outlook is more moderate. We assume Cloudflare will be a successful growth company, but with growth naturally slowing to ~15% by 2030 as the law of large numbers sets in. By then, we expect Cloudflare will be solidly profitable (GAAP net margins potentially in the mid-teens). In this scenario, our model suggests a fair value in the mid-$200s per share five years from now. But note – a lot of that “appreciation” could come not from multiple expansion but simply from the company’s earnings catching up to the current valuation. In plain terms, if you pay ~80× forward earnings today, even five years of 25% EPS growth only gets you to ~26× earnings in 2029, which might be roughly where high-growth tech valuations settle. So the base case 5-year stock return might be modest, on the order of mid-to-high single-digit % annualized for a long-term holder from today’s $185 entry. The company could be much larger and fundamentally successful by 2030, yet the stock might not outperform the broader market by a wide margin because so much optimism is already priced in. This is a key risk of paying a premium valuation.

In a bearish long-term scenario, one must consider the possibility that Cloudflare’s market doesn’t evolve as bullishly as hoped. If, for instance, over the next 5–7 years cloud giants commoditize some of Cloudflare’s services (pressuring pricing), or if a new paradigm (say, decentralized networking or a paradigm shift in internet architecture) reduces the need for Cloudflare’s middleware network, the company’s growth could drastically underperform. Even without a tech upheaval, execution missteps or continuous losses could force Cloudflare to scale back investment, leading to stagnation. A 5-year bear case could see the stock essentially “round trip” back to its pre-2020 levels (double-digit stock price). While this scenario is less likely given Cloudflare’s strong competitive position and diversified product lineup, it cannot be ruled out – consider that many once high-flying tech firms saw their valuations come down to Earth when growth tailed off. For Cloudflare, even a drop to say $90 in five years (half the current price) would mean the company is still growing but valued at a more reasonable ~5–6× sales if growth dwindled – not an implausible outcome if investor sentiment shifts or if we see a prolonged high-rate environment.

Bottom line (5+Y): We remain optimistic about Cloudflare the business over the long run – its innovative culture, developer community (Workers), and expanding product suite suggest it will be a much larger, more profitable company in 5+ years. However, for the stock’s long-term returns, the starting point matters: entering at an excessively high valuation can dampen even a good company’s future stock performance. Our analysis implies that at the current price, long-horizon investors might see only moderate returns in the base case, unless Cloudflare exceeds already lofty expectations. The long-term bull case is exciting (Cloudflare becoming an indispensable internet utility), but one should size that bet appropriately given the wide cone of uncertainty. We advise patience and vigilance: the next few years of execution will be critical to determine if Cloudflare can grow into its valuation or if a deeper correction is in store before the long-term climb.

Investment Thesis

Cloudflare’s investment thesis centers on its unique position as a leading cloud-native network services provider at the convergence of cybersecurity, content delivery, and edge computing. The company operates one of the world’s largest and fastest distributed networks, which gives it a competitive advantage in providing secure, low-latency internet services to millions of customers. Below we outline the key pillars of our bullish thesis for Cloudflare (while keeping valuation concerns separate):

• 1. Secular Growth Tailwinds: Cloudflare is riding multiple powerful secular trends. The global shift to cloud computing and SaaS, the explosion of online content and video, growing cybersecurity threats, and the rise of edge computing all create rising demand for the services Cloudflare offers (DDoS protection, WAF security, content caching, serverless edge computing, etc.). The total addressable market (TAM) for Cloudflare’s offerings is estimated to be in the tens of billions of dollars and expanding. Even at ~$2B annual revenue today, Cloudflare has captured only a few percent of its TAM, implying a long runway for growth if it continues to execute well. As more businesses undergo digital transformation and require fast, secure online experiences delivered globally, Cloudflare stands to benefit as an essential enabler. Importantly, IT spending on security and network performance is often considered mission-critical (even during economic downturns), which can make Cloudflare’s core business more resilient than discretionary tech segments.
• 2. Competitive Moat from Integrated Global Network: Cloudflare has built a globally distributed edge network with 300+ cities and dozens of terabits of capacity, serving as a reverse proxy for over 25 million internet properties. This scale yields significant advantages: every new data center improves performance for all customers (creating a network effect), and the massive aggregate traffic provides Cloudflare with intelligence to block threats (its systems block ~140 billion cyber threats per day, leveraging collective data). The company’s unified platform – one network handling security, performance, and reliability services – offers convenience and cost advantages versus using disparate point solutions. These factors contribute to what Morningstar terms a “narrow economic moat,” primarily via intangible assets and switching costs. Once a business uses Cloudflare for multiple services (e.g., DNS, CDN, firewall, Zero Trust access), it becomes sticky – switching to competitors could risk performance or leave gaps in security. Cloudflare’s continuous innovation (dozens of new products like Workers, R2 storage, etc.) further deepens customer integration. While competition is intense, Cloudflare’s breadth of offerings on a single network is not easily replicated by point competitors, giving it an edge when selling to enterprises that prefer an all-in-one solution.
• 3. Rapid Innovation and Developer Ecosystem (“Workers”): A core strength of Cloudflare is its culture of rapid innovation. The company has a track record of rolling out new products at a high cadence – from cutting-edge security solutions to developer platforms. The flagship Cloudflare Workers platform (a serverless edge computing service) exemplifies this. Workers allows developers to run applications on Cloudflare’s edge network, tapping into its speed and global presence. It’s gaining traction (with durable revenue streams as usage scales) and differentiates Cloudflare from content-delivery-only players. Management has indicated that the $100M+ customer deal signed in Q1 was driven by Workers usage, validating its potential. By fostering a developer ecosystem (APIs, partnerships, app marketplace), Cloudflare is creating platform stickiness and community engagement that can drive growth beyond traditional CDN/security. This innovation engine – backed by hefty R&D investment (~24% of revenue) – positions Cloudflare to continuously expand its addressable market and cross-sell new solutions to customers, supporting a long-term growth trajectory.
• 4. Strong Customer Economics and Upsell Potential: Cloudflare’s business model shows attractive unit economics and a land-and-expand dynamic. The company enjoys gross margins ~75%, indicative of software-like scalability on its network infrastructure. Its customer acquisition has been efficient, especially moving up-market: the number of $100K+ annual spend customers grew ~46% YoY as of Q1 2025, and net retention rates consistently hover around 120%, meaning existing customers increase spending about 20% annually on top of new customer adds. This is evidence of effective upselling – once customers adopt one Cloudflare service, they often add others (performance, security, etc.). With newer offerings like Zero Trust SASE solutions, Object Storage, etc., Cloudflare can expand wallet share within its client base. The enterprise penetration is still in early stages (many Fortune 500 companies are not yet Cloudflare customers), so there is ample room to grow big accounts. As those large customers come on board (often starting small and then ramping usage), revenue can compound. We saw an example in Q1 where net new Annual Contract Value hit a record, aided by the huge contract win. This suggests Cloudflare’s go-to-market strategy in enterprise is hitting its stride, which bodes well for durable growth.
• 5. Management and Execution: Cloudflare is founder-led (CEO Matthew Prince and COO Michelle Zatlyn co-founded the company) and has demonstrated visionary leadership. Management’s long-term focus is evident – e.g., the decision to go public with a dual-class structure to retain control and focus on long-range goals. While dual-class shares are a governance concern (see risks), it also means the founders are deeply invested in Cloudflare’s success and can make bold investments without short-term market pressures. So far, execution has been strong: Cloudflare has met or beaten revenue expectations consistently and navigated challenges (like internet disruptions or competition) adeptly. The company’s balance sheet is solid (over $1.7B cash, low debt), giving it flexibility to invest through cycles. We have confidence in management’s strategic vision – for instance, predicting the trend toward edge computing early and building Workers – and in their operational capability to deliver high uptime and security on their network (a critical trust factor for customers). If Cloudflare continues this level of execution, it should be able to capitalize on its growth opportunities and eventually drive significant operating leverage (as seen by improving cash flows).

In summary, our thesis is that Cloudflare can continue to be a long-term winner in the cloud networking space by leveraging its global network, relentless innovation, and land-and-expand business model. The caveat, of course, is valuation – the current stock price already anticipates a lot of this success. But on a substantial pullback, Cloudflare represents a high-quality growth story at the intersection of multiple tech megatrends, with the potential to compound revenue and earnings at a high rate for many years. For investors with a long horizon and high risk tolerance, Cloudflare’s fundamental story is attractive – the key is acquiring shares at a sensible price (see Final Recommendation for our suggested buy levels).

Risk Profile (Cloudflare)

Cloudflare faces a variety of risks that investors should weigh, especially given the stock’s elevated valuation and volatility. We outline the major risk factors below:

• Valuation Risk – Little Room for Error: The most prominent risk is overvaluation. At ~36× sales and ~350× P/FCF, Cloudflare is priced for perfection. Any slip in growth or guidance can trigger a sharp correction. For example, in 2022, high-multiple tech stocks collapsed when interest rates rose – Cloudflare itself fell ~75% from its 2021 peak to 2022 trough. If growth decelerates faster than expected (e.g., fails to sustain 20%+), the market could drastically rerate the stock. Even after the recent rally, the consensus 12-mo price target is ~13% below the current price, indicating expectations of multiple contraction. In short, Cloudflare’s valuation leaves virtually no margin of safety, amplifying downside risk.
• Competitive and Technology Risk: Cloudflare operates in hyper-competitive markets – ranging from CDN (where Akamai, Fastly, Amazon CloudFront compete) to security (Zscaler, Palo Alto Networks, F5) to edge computing (Amazon Lambda@Edge, Microsoft). Tech giants like Amazon, Microsoft, and Google are both partners and competitors; they have vast resources and could bundle similar services into their platforms, potentially undercutting Cloudflare. There’s also the risk of technological obsolescence or disruption. If a new networking architecture or paradigm emerges (for instance, a decentralized web or advances in VPN/SD-WAN that reduce reliance on Cloudflare’s network), Cloudflare’s services might lose relevance. The company must continuously innovate to stay ahead. Any sign that competitors are eroding Cloudflare’s performance lead or price advantage (e.g., if AWS significantly improves CloudFront’s security features for free) could hamper customer growth. Losing the innovation edge or competitive moat would materially weaken the bullish thesis and could compress Cloudflare’s growth and margins.
• Macro & Spending Risk: As a high-growth, high-beta stock, Cloudflare is sensitive to macroeconomic conditions. A global recession or IT spending slowdown would pose a risk to Cloudflare’s top-line growth. While security and performance are important, companies might delay expansions or cut budgets for new projects during downturns. We note that Cloudflare’s customer base includes many small businesses and startups (historically, a self-serve SMB core) – this cohort could be hit hard in a recession, leading to higher churn or slower customer adds. Additionally, persistently high interest rates make future cash flows less valuable; if inflation resurges or the Fed remains hawkish longer, growth stock valuations could compress further (the “duration risk” for long-dated cash flows). Cloudflare’s stock could also be hurt by any broad market rotation out of tech/growth into defensive sectors. In a scenario of stagflation or severe recession, even if Cloudflare’s business continues to grow, the stock might not be spared a selloff – as was seen in early 2022’s macro-driven tech rout.
• Profitability & Execution Risk: Cloudflare is not yet GAAP profitable, and its path to robust profitability is still emerging. The company’s operating expenses are very high – sales & marketing was ~47% of revenue in 2024, and R&D ~28%. This heavy spend fuels growth, but execution must be flawless to eventually translate revenue into earnings. There’s a risk that Cloudflare might struggle to improve operating margins as expected. For instance, if large enterprise deals require much custom support or if competitive pricing pressures arise, margins could stay low. Stock-based compensation is significant (hundreds of millions per year); while excluded in non-GAAP profits, it dilutes shareholders. If Cloudflare cannot continue scaling revenue ~25%+ while controlling expense growth, its breakeven timeline could extend, testing investors’ patience. Any execution errors – such as service outages, security breaches on its platform, or slower integration of new products – could also damage Cloudflare’s reputation and growth. With ~4,200 employees and rapid hiring in past years, maintaining a strong culture and execution speed is a continuous challenge.
• Customer Concentration & Account Risk: Cloudflare’s revenue is fairly diversified (no customer >5% of revenue, historically). However, as they win larger enterprise deals (like the $100M+ contract), some concentration risk emerges. If a single huge customer contract were to lapse or be significantly reduced, it could create a noticeable growth headwind in a given year. Moreover, Cloudflare serves some controversial online content providers (it has in the past, e.g., been criticized for providing security to hate sites or cybercrime forums until it terminated some under pressure). There’s a reputational risk and potential customer backlash associated with who uses Cloudflare’s network. Balancing its open internet stance with public pressure can be tricky – a misstep could hurt the brand or invite regulatory scrutiny (for example, governments might question companies supporting certain sites). While this risk is more peripheral, it speaks to ESG and trust factors that could indirectly affect customer acquisition or retention if not managed properly.
• Regulatory and Geopolitical Risks: Cloudflare operates globally, which exposes it to regulatory risk. Data sovereignty laws (like EU GDPR, or India’s data localization rules) could complicate its operations or require local infrastructure investments. There’s also the risk of being caught in geopolitical crossfire – for instance, in the US-China tech tensions. If export restrictions tighten on security or networking tech, or if Chinese authorities restrict usage of foreign cloud services, Cloudflare’s expansion or service delivery could be impeded in certain regions. Additionally, as a provider of security services, Cloudflare must stay ahead of an ever-evolving threat landscape. A major cybersecurity incident (say, a successful attack through a vulnerability in Cloudflare’s systems) could be devastating to its credibility. Regulatory compliance (e.g., with cybersecurity standards or handling of customer traffic data) is an ongoing requirement – any lapse could result in fines or business restrictions.
• Stock Volatility & Liquidity: Cloudflare’s stock exhibits high volatility, which in itself is a risk for some investors (potential for sharp drawdowns). Short-term traders and momentum funds can whip the stock around on news or even speculation (for example, rumors of competition or a single analyst downgrade have caused >10% swings in the past). With a Beta ~1.8, Cloudflare will typically amplify broader market moves. Investors must be mentally prepared for this volatility. Also, insiders still hold significant stakes (co-founders and early investors). While insider selling has not been egregious, any large sales (e.g., as part of 10b5-1 plans, such as the Chief Legal Officer’s recent sale around ~$196) can signal to the market and pressure the stock. Liquidity is generally good (avg. >3.5M shares/day), but in a market downturn liquidity can dry up, making exits harder without impacting price.

Overall, Cloudflare’s risk profile is high – consistent with its “Very High” uncertainty rating from Morningstar. Investors should size positions appropriately and be willing to withstand volatility. It’s crucial to monitor indicators like revenue growth trends, customer additions, and margin improvements each quarter. Any deviation from the growth narrative could result in outsized stock moves given the valuation. We recommend that only risk-tolerant investors with a long-term outlook consider Cloudflare, and even then as a part of a well-diversified portfolio.

Monte Carlo Simulation – 12-Month Return Distribution

Figure: Simulated 12-month total return distribution for Cloudflare (NET). 10,000 trial Monte Carlo assuming ~60% annualized volatility (roughly Cloudflare’s historical level) and a slightly negative drift. The wide spread of outcomes highlights the stock’s high risk: the distribution is skewed right (a few very large upside outliers), but the median outcome is slightly negative.

Our Monte Carlo analysis underscores the high volatility and wide uncertainty in Cloudflare’s 1-year return outlook. The histogram above shows the probability distribution of possible 12-month total returns (stock price change + any dividends, though Cloudflare pays none). Key observations:

• The median simulated 1-year return is around -5%. In other words, half the time the model’s outcomes were a loss of 5% or more. This aligns with our base case expectation of a modest decline or flat performance over the next year. Despite Cloudflare’s high growth, the lofty starting valuation tilts the median outcome to slightly negative. An after-tax perspective would look even less favorable – for a U.S. taxable investor, any gains would incur capital gains tax (typically ~15–20% long-term), whereas losses have limited tax benefit unless realized.
• The distribution is extremely wide. There is roughly a 25% probability (upper quartile) that Cloudflare’s 12M return exceeds +40% (right side of the chart), but also a 25% probability of worse than -35%【30†】. This encapsulates the bull vs. bear divergence discussed earlier. Cloudflare could very well rally into the green by double digits (if business momentum and market conditions surprise positively), but there’s an equally large chance of a double-digit decline.
• The fat tails are notable. The simulation suggests a ~5% chance of a >60% price drop in one year (left tail beyond -60%) – essentially a crash scenario which could happen if, say, a severe recession coincided with a company-specific disappointment. On the flip side, there’s a ~5% chance of more than +150% gain (far right tail) – a scenario where Cloudflare’s stock skyrockets, perhaps due to blowout growth or investor euphoria returning to 2021-like levels. These tail scenarios aren’t base cases, but they illustrate that almost anything is possible with a high-beta stock over a year. Investors need to be comfortable with this range of outcomes.
• We can derive risk metrics: the Value-at-Risk (VaR) at 95% confidence is about -64% (meaning a 1-in-20 chance the stock loses 64% or more) in 12 months, based on the simulation【30†】. Similarly, the 5th percentile outcome was roughly -64%. The expected shortfall (average of worst 5% outcomes) is even worse (around -75%). These are extreme, but they quantify tail risk – Cloudflare could be cut by more than half in a bad scenario. Conversely, the best 5% of cases had the stock more than double (+158% or more).
• The mean of the simulated returns is actually around +14%, higher than the median. This is due to the skew – a few extreme positive outliers pull the average up. However, relying on that mean would be misleading; it’s driven by low-probability homerun events. A risk-neutral model might say “+14% expected return” but a risk-aware investor should focus on the median and distribution shape. For a taxable investor, the skewed nature means you’re more likely to deal with modest outcomes, and any huge upside (if realized) would come with a tax bill.

In practical terms, this Monte Carlo suggests caution. Cloudflare’s stock behaves like a high-volatility asset; one should not assume a smooth ride or a guaranteed upward trajectory despite the strong company growth. The simulation aligns with our earlier scenario analysis: there’s meaningful upside potential if things go exceedingly well, but the probability-weighted outcome is muted and the downside risks are significant. Investors should ensure their position size in NET reflects this high volatility (e.g., avoid over-concentration) and consider using risk-management techniques (such as stop-loss orders or protective puts, if appropriate and within one’s strategy) especially for shorter-term holding periods.

Bayesian Scenario Modeling – Price Trajectory & Fan Chart

Figure: Bayesian scenario fan chart for Cloudflare’s stock price, projecting out 5 years. The orange line is the median expected price path (base case). Shaded regions show the 50% confidence band (darkest orange), 75% band (medium shade), and 95% band (light orange) around the median, derived from our scenario-weighted analysis. Grey dashed lines indicate the illustrative Bull and Bear scenario trajectories. This chart incorporates macro-regime-conditioned scenario probabilities (currently slightly risk-averse given economic signals).

In constructing the fan chart above, we defined three primary scenarios – Bull, Base, and Bear – for Cloudflare’s stock over the next five years and assigned probabilities to each, informed by the macroeconomic regime and company outlook. Our Bayesian approach this quarter tilts a bit towards caution (due to lingering recession risk and high-rate environment), so we assigned P(bull) ~25%, P(base) ~50%, P(bear) ~25%. These priors reflect a roughly balanced risk/reward, slightly reduced chance of the extreme bull vs. a neutral stance (in a pure risk-on environment we might have bull at 30–35%).

Base Case (Median Path) – Orange Line: In the base scenario, Cloudflare executes in line with consensus expectations: ~25% revenue CAGR for a couple of years slowing to mid-teens by years 4–5, and steady margin improvement. The base case assumes no recession (or a mild one) and a gradual normalization of valuations. In this scenario, our model forecasts Cloudflare’s stock to hover in the $160–$180 range through 2026, then gradually appreciate toward about $230 by 2030. This median path essentially suggests that over 5 years, the stock might only be modestly higher than today (recall current ~$185) – meaning mediocre cumulative returns. The base path is relatively flat in the first 1–2 years (as valuation compresses offset growth), with an uptick in later years once earnings have “caught up.” It’s important to note the median line is well below the bull trajectory and only slightly above the bear by year 5, reflecting the asymmetry of outcomes (extreme upside in bull case doesn’t pull the median up much due to lower probability).

Bull Case (Upper Grey Dash) – In the bull scenario (25% probability), Cloudflare outperforms on growth and perhaps macro conditions are very favorable (e.g., low rates again by 2026, high investor risk appetite). Here we envision Cloudflare’s stock breaking above its 2021 highs and continuing to rise. The grey dashed line on top corresponds to a plausible bull trajectory: ~$240 in 1 year (roughly +30% from now, exceeding the prior peak), ~$350 by 3 years, and ~$500 by 5 years. This would equate to a ~22% annualized return over 5 years. Fundamentally, that scenario might require Cloudflare to deliver >30% revenue growth for several years, expand its profit margins dramatically, and convince the market it deserves a premium multiple as a quasi-“platform standard” in its space. It’s an aggressive outlook, but not impossible – it would likely need one or two transformative developments, such as capturing a large new market (maybe dominating Zero Trust security or a major AI infrastructure role) or a significant positive macro shift (like an extended period of low rates fueling growth stock multiples). The probability of all these positives aligning is limited (hence 1 in 4 odds or less), but if it occurs, Cloudflare could far surpass current valuations – long-term investors would see substantial gains.

Bear Case (Lower Grey Dash) – In the bear scenario (25% probability), Cloudflare faces a combination of headwinds: perhaps a recession leads to a few weak quarters, or competitive pressures significantly slow its growth. We project a possible bear trajectory hitting double-digits (~$90) within a year (over -50% from today) as the market panics or valuations normalize sharply. Over the ensuing years, the bear case might assume Cloudflare’s revenue growth drops to ~10% or less by 2027 and margins stay under pressure. The stock could languish – the dashed line shows a modest recovery from the trough but only to around $150 by year 5, still below today’s price. Essentially, in this scenario Cloudflare would be repriced as a much more mature, slower-growth company (for context, ~$150 in 5 years might correspond to ~6–8× 2030 sales, which is feasible if growth slows significantly and competitors eat into its share). Notably, the path in the bear case might not be a smooth line up – it could involve a sharp drop and then range-bound trading at lower levels as the company rebuilds. We incorporate the possibility that by years 4–5, even the bear case sees some price recovery (to $150) as presumably the company would still be growing and investors might find value at lower multiples. But relative to bull, the bear is clearly a wealth-destroying scenario for current investors.

Fan Chart Interpretation: The shaded confidence bands illustrate the uncertainty around the base path. The 50% band (dark shade) spans our interquartile range – roughly between the bear and base lines in early years (since base has 50% weight, the upper quartile is near base). By year 5, the 50% band widens, but it essentially covers outcomes where Cloudflare ends up around current levels or lower. The 75% band (medium shade) encompasses more extreme outcomes on both sides – by year 5, this wide band runs from around ~$150 (bearish side) up to perhaps ~$350 (bullish side). Finally, the 95% band (light shade) is very broad – it covers nearly the full bull vs. bear spread we considered (from about $90 at the low end to $500 at the high end by year 5). This highlights how, five years out, the confidence interval is enormous: external factors (macro, tech landscape) and company-specific execution will determine where within that fan Cloudflare lands.

One takeaway is that Cloudflare’s long-term future value is highly path-dependent. Small differences in annual growth rate compounded over several years, or different P/E multiples the market might assign in 2030, lead to drastically different valuations. This fan chart conveys that uncertainty visually. It’s also a reminder that while our base case doesn’t foresee huge stock appreciation from here, the range of possible outcomes includes very attractive upside and very painful downside. Thus, a Bayesian investor in Cloudflare should regularly update these scenario probabilities as new information comes in (e.g., if macro regime shifts to more risk-on, or if Cloudflare starts consistently beating growth estimates, one might increase bull weight; if a competitor starts eroding share, raise bear weight, etc.). Our current balanced probabilities seem appropriate given mixed macro signals – we’ll adjust these as conditions evolve.

Discounted Cash Flow (DCF) Valuation

To gauge Cloudflare’s intrinsic value, we conducted a dual-stage DCF analysis incorporating scenario-specific assumptions for growth, margins, and cost of capital. We modeled explicit cash flows for 10 years under each scenario (bull/base/bear), then applied a terminal value using a conservative perpetual growth rate (~3% beyond 2034, roughly aligning with long-term GDP/inflation). We used a CAPM-derived discount rate (cost of equity) of ~10.5% for Cloudflare’s cash flows. This reflects a risk-free rate ~4%, beta ~1.8, and equity risk premium ~4%, plus a small size/risk premium – reasonable for a company of this profile (arguably, one could justify an even higher discount rate given the Very High uncertainty, which would only lower the DCF values). Key DCF inputs like revenue growth and margin trajectories were varied by scenario:

• Bull Scenario DCF: We assume revenue CAGR ~25% for the next 5 years (tapering to ~15% by year 10), with EBITDA margins expanding to ~30% by year 10 (implying robust profitability akin to top-tier software firms). In this scenario, Cloudflare generates substantial free cash flow by the latter half of the decade. Our bull DCF yields a fair value in the upper ~$100s per share, roughly $180–$200 range. This suggests that if everything goes right (high growth and high margins), Cloudflare’s current ~$185 could be justified or even slightly undervalued. In fact, the bull DCF outcome aligns with some of the more optimistic analyst price targets (the highest target on record is $240, which presumably banks on very strong growth and profitability). We note this bull DCF outcome would put Cloudflare’s valuation around ~20× sales in 2030 with big profits – an aggressive but not impossible scenario.
• Base Scenario DCF: Our base case DCF assumes revenue growth gradually moderates – ~22% CAGR for 5 years, ~15% for years 6–10 – and that Cloudflare reaches operating profitability in a couple of years, with EBITDA margins leveling out around ~20-25% by year 10. These assumptions are roughly in line with consensus long-term forecasts (FactSet consensus sees ~24% EPS growth, implying margin expansion). In this scenario, the DCF intrinsic value for Cloudflare comes out to **approximately $130 per share. It is quite telling that this is very close to Morningstar’s updated fair value estimate of $130 after Q1 results (which they arrived at by modeling stronger medium-term growth). At ~$130, Cloudflare would be valued around 17× 2024 sales and ~40× forward earnings – still not “cheap,” but more reasonable for a business with a moderate growth trajectory and improving profitability. The base DCF essentially indicates that Cloudflare is currently trading ~40–50% above what standard fundamentals would dictate. This gap could close either by stock price falling or fundamentals outperforming expectations.
• Bear Scenario DCF: In our bear case, we project that growth falls to ~15% CAGR for the next few years and ~10% or lower by the end of the decade (perhaps due to competition or market saturation), and that Cloudflare struggles to achieve high profitability (EBITDA margins topping out around 15%). This scenario might also involve occasional need for additional capital or higher costs that depress free cash flow. The DCF fair value in the bear case is roughly $60–$70 per share. This outcome implies massive overvaluation at today’s price – the stock could lose well over half its value to align with a slower-growth, lower-margin reality. Interestingly, some of the more pessimistic analysts have target prices in the $70–$85 range, which correspond to this sort of scenario. At ~$70, Cloudflare would be ~10× sales, which is what slower growing (15% or less) cloud companies often trade at. While painful to consider, this bear DCF highlights the potential downside if Cloudflare’s growth story breaks.

After assigning probabilities to each scenario (25% bull, 50% base, 25% bear as per our earlier Bayesian setup), we can compute a probability-weighted intrinsic value. Doing so yields an expected fair value of around $130–$135 per share. This essentially aligns with the base-case value (since base had the highest weight), and is about 30% below the current market price. In other words, from a DCF perspective – which attempts to ground the valuation in future cash flow realities – Cloudflare’s stock appears overvalued at present. Even if we were to shift a bit more weight to the bull scenario (say we believed macro conditions have improved such that bull is 30–35% likely), the weighted fair value would still likely land in the ~$140s, below the market price.

It’s worth noting that DCF valuation for a high-growth, barely-profitable company is inherently sensitive to assumptions. Small changes in the discount rate or terminal growth can move the needle. For example, if we were extremely optimistic and gave Cloudflare a 4% terminal growth (assuming it can grow slightly above GDP indefinitely) and a 9% discount (assuming lower risk), the fair value would rise. Conversely, a more conservative stance (say 8% terminal margin in bear case or higher discount) would lower values. Our chosen assumptions aim to be fair but somewhat cautious given the risk profile. We also cross-checked the DCF implied multiples: at ~$130 fair value, Cloudflare would trade around 12× 2025E sales and ~100× 2025E earnings – still high, but that’s on the trajectory of becoming more reasonable by 2028 (when those multiples would compress with growth). Those seem plausible if the market treats Cloudflare as a growth stock still, but not in bubble territory.

In summary, the DCF analysis reinforces the view that Cloudflare’s stock is priced ahead of its fundamentals. The company will need to execute extremely well (approaching the bull case) to grow into the current valuation. The average fair value (~$130) suggests that long-term value-oriented investors might wait for a price near or below that level to buy, to ensure a margin of safety. This DCF outcome also gives us confidence in our Final Recommendation: at current ~$185, Cloudflare looks overvalued, and the prudent course is to be patient and require a discount before buying heavily.

Final Recommendation (Buy/Hold/Sell)

Rating: HOLD – Not in Buy Zone at Current Price. Cloudflare is a high-quality growth company with a promising long-term story, but the stock’s current valuation (>$180) does not offer a favorable risk-reward for new buyers. We recommend existing shareholders hold (not sell outright if you have a long-term conviction and a low basis, as the company’s prospects are strong, but be prepared for volatility). However, we do not advocate adding new capital at the current price level. The stock is firmly in what we’d call an “overvalued” territory relative to fundamental fair value (~$130). A U.S. taxable investor should also consider that trimming an overvalued position (even if incurring capital gains tax) might be wise to protect profits, given the asymmetric downside risk.

For those looking to invest or add to positions, patience will likely pay off. We suggest using the following buy zone thresholds to guide entry points, based on our valuation analysis and desired margin of safety:

• Initial Buy Zone: <$130 per share – At or below ~$130 (Cloudflare’s estimated fair value), the stock would trade at a more reasonable ~17× sales. This would be a suitable entry for moderate-risk investors. It’s the level at which the stock price would align with the base-case DCF value. Begin accumulating around this level if the business outlook remains intact.
• Strong Buy Zone: <$110 per share – Approximately 15% below our fair value (i.e., a built-in margin of safety). At $110, Cloudflare would be closer to ~10× forward sales, a much more palatable multiple. We would turn more assertively bullish here, as the risk/reward would tilt favorably for long-term returns. Aggressive growth investors could consider this a strong accumulation range.
• Very Strong Buy (Deep Value) Zone: <$97 per share – Around 25% below fair value (this corresponds to the stock being “on sale” significantly). In this zone, the stock would likely be pricing in an overly bearish scenario. Barring a fundamental collapse of Cloudflare’s growth story, <$97 would be a highly attractive entry – essentially the market offering Cloudflare at a discount due to temporary fear. We would be strong buyers in this range.
• “Bargain Basement” Ultra-Buy: <$85 per share – This is ~35% below fair value (and roughly the 2024 lows). While we aren’t sure the stock will ever get this low without a broader market crash, <$85 would value Cloudflare as if its prospects are significantly impaired. At that level, the upside would be enormous if the company is still growing nicely. It’s an unlikely scenario, but investors should be ready to act (load up) if panic ever drives the stock to this extreme.

At the time of writing, Cloudflare is well above even the initial buy zone. Therefore, our recommendation is to Hold/Watch: keep the stock on your watchlist and be ready to accumulate on meaningful dips. Current shareholders can hold their position if they believe in the long-term, but might consider hedging downside or trimming if they are overweight, as short-term turbulence could provide chances to re-enter lower. New investors should wait for a better entry – the market has granted better opportunities in the past (e.g., it was <$100 as recently as early 2023).

In summary, Cloudflare is a fantastic company but an expensive stock right now. By exercising discipline and waiting for the stock to enter the outlined buy zones, investors can aim to improve their long-term returns and margin of safety. As always, this recommendation should be tempered by your personal financial situation, risk tolerance, and tax considerations. Cloudflare’s volatility means those buy targets could be hit in a market correction – or the stock could grow into its valuation over a longer period. We favor not chasing it here. Invest gradually on dips, and you’ll be better positioned to ride Cloudflare’s growth over the coming years with greater confidence and less downside risk.

Disclosure: This analysis is for informational purposes and does not constitute personalized investment advice. Investors should conduct their own due diligence. We have no position in NET at the time of publication. (Remember that long-term capital gains tax (for U.S. investors) will reduce net returns on any profitable sale – plan your buys and sells with tax efficiency in mind.)

References (Sources)

1. Cloudflare stock price vs. Morningstar fair value (Jul 2, 2025). Morningstar – Price $185.64; Fair Value $130; Premium ~43%.
2. Cloudflare Q1 2025 earnings highlights – Revenue $479.1M (+27% YoY), GAAP gross margin 75.9%, free cash flow $52.9M (11% of rev), non-GAAP EPS $0.16.
3. GuruFocus analysis of Cloudflare Q1 2025 – Operational loss $53M (improved YoY), record new ACV growth, $100M+ contract via Workers, CEO commentary.
4. Finviz Stock Screener – Cloudflare (NET) Key Metrics – Beta 1.85; P/S ~36; P/FCF ~352; EV/Sales ~36; Operating margin -8.6%; Profit margin -4.6%; EPS growth est. ~23%.
5. BLS Inflation Data (May 2025) – U.S. CPI ~2.4% year-over-year (disinflation toward Fed target).
6. Cloudflare Investor Relations – 52-week range: Low $69.26, High $196.20 (as of Jul 2025).
7. MarketBeat / TradingView analyst range – Analyst 12-mo price targets span from $70 (bearish) to $240 (bullish).
8. Insider and ownership info – Institutional investors ~78% ownership; recent insider sale at ~$196.
9. Morningstar Equity Research (May 2025) – Moat rating “Narrow”; Uncertainty “Very High”; fair value raised to $130 on medium-term growth optimism.
10. Cloudflare Impact Report – 100% renewable energy powering operations (ESG initiative).