When Amazon Web Services (AWS) caused widespread internet disruption in late October, AMZN stock took a substantial boost. Yet, reflecting the difference in scale, since Cloudflare’s “internal service degradation” began unfolding at 11:48 UTC, NET stock has slipped over 4% on Tuesday, continuing the slide from Monday.
As of the latest update, Cloudflare (NYSE: NET) has managed to restore services fully. Users most affected ranged from OpenAI’s ChatGPT, Elon Musk’s X, and various online gaming platforms. This is to be expected given that Cloudflare’s Content Delivery Network (CDN) service is used by 20.4% of all the world’s websites, according to Tuesday’s W3Techs’ data.
It is then no surprise that, despite Cloudflare’s weekly decline of nearly 16%, NET stock performed exceptionally well this year, having gained 76% value year-to-date. But does this mean investors should consider NET a buy-the-dip opportunity?
How Does Cloudflare Fit the AI Narrative?
As the middleman security guard for the internet’s traffic, Cloudflare is in a unique position to understand data flows. Specifically, when its Content Delivery Network (CDN) stores copies of websites all around the world, it does so to ensure that huge fake crowds (DDOS attacks) don’t shut down the service of real customers.
Likewise, the company checks for troublemakers, such as hackers or bots, intercepting their sabotage before they even try to break in. On top of this, Cloudflare provides security and helps websites load faster within a free tier service, which drastically expanded its reach and global status.
As the AI investment cycle ramped up, turning Nvidia into the world’s first $5 trillion company, Cloudflare significantly benefited from the AI narrative as well. First, the company introduced a default permission-based model for AI scraping in early July. This was a critical remedy needed in the new ecosystem of AI crawlers churning out results for end-users.
“So if you look at OpenAI, if you look at Anthropic, if you look at Perplexity, even if you look at modern Google, they are not a search engine, they don’t give you a treasure map. Instead, they give you an answer right at the top of that page. That answer, for most users, 95% of the users, 95% of the time, it’s a better user interface.”
Cloudflare CEO Matthew Prince to Stratechery
Consequently, if there is no longer a need to visit actual websites but to rely instead on Google’s “AI Overview”, the incentive structure is greatly weakened to create new content. Cloudflare CEO Matthew Prince believes his AI crawler block will create a new business model for companies – pay-per-crawl – making the traditional ad revenue model from traffic take a back seat.
“My utopian vision is a world where humans get content for free, and robots have to pay a ton for it.”
Cloudflare CEO Matthew Prince to Time Magazine
Secondly, it appears that Cloudflare fully embraced so-called “vibe-coding”, as evidenced by the launch of its VibeSDK demo platform in late September. Similar to how people generate images, videos or text with large language models (LLMs), vibe coding makes it possible to build apps with prompts.
This puts the old “learn to code” narrative in the garbage bin of history, as users can construct code with natural language, provided it is sufficiently meticulous and if users’ goals are clear. However, this approach is likely to generate security holes, which is where Cloudflare Sandboxes come in – isolated environments where users can test the code’s full range before public preview.
With enough testing and error-fixing, again with AI, Cloudflare is then building an attractive infrastructure for the new AI-powered web. We have seen the power of this narrative in the crypto space as well, when Internet Computer Protocol (ICP) launched the caffeine.ai building platform, triggering the price surge of ICP tokens in late October.
This strategy fits neatly with Cloudflare’s Monday announcement to acquire Replicate, an AI platform for developers to deploy and run AI models.
Cloudflare’s Financials So Far
In the Q3 earnings report, ending September 30, Cloudflare increased its year-over-year revenue by 31% to $562 million. The company is still not in the sustained profitability zone, but getting close to it, which is reminiscent of Palantir’s profitability arc. This quarter, Cloudflare reported only $1.3 million net loss vs $15.3 million net loss in the year-ago quarter.
In this period, the company’s free cash flow (FCF) nearly doubled, from $45.3 million to $75 million. However, due to AI capex, Cloudflare’s gross margin took a hit in Q3, shrinking from 77.7% in the year-ago quarter to 74%.
Interestingly, when MongoDB CEO stepped down in early November, Cloudflare’s president of product and engineering CJ Desai filled the role.
Moving forward, Cloudflare expects to see $2.142 – $2.143 billion in revenue for the full-year fiscal 2025, up from $1.669 billion in 2024, which represents a 27% growth from 2023.
NET Price Targets
At the current price level of $196.53, NET stock is significantly under its $244.59 average price target. Most analysts are in the “buy” camp, at 17, with 12 recommending “hold”, according to Wall Street Journal consensus. Only two analysts are bearish.
The low-end of NET stock is $117, while the high-end price target is $318 per share. At the end of the line, considering Cloudflare’s buildup and rapid adoption with vibe-powered VibeSDK and Workers AI platform, investors should consider the current stock price deflation triggered by the outage an opportune moment.