cloudflare (Net -3.73%) The stock has shown a remarkable recovery since May, surging 54% since falling sharply on April 28 following the company’s first quarter 2023 earnings results. Shares of the internet infrastructure service provider fell 21% in a day as investors panicked at news of the company’s slowing growth. Cloudflare not only issued a lukewarm outlook for the quarter, but also lowered its outlook for the full year. Still, investors seem to be quick to forget the past, and Cloudflare’s stock is on the rise again.
Let’s see why.
AI Could Be Cloudflare’s Key Growth Driver
Artificial intelligence (AI) has been a major theme in Cloudflare’s last two earnings calls. The company noted in its February earnings call that “a major generative AI company just signed a one-year, $1 million deal.”
It’s worth noting that the deal Cloudflare management spoke of in February was with none other than OpenAI. The AI startup chatbot – ChatGPT – has gained so much attention in such a short time that it needed to quickly ramp up its cloud infrastructure to serve the millions of users who flock to the service. According to Cloudflare CEO Matthew Prince, OpenAI’s existing infrastructure at the time “was capable of handling not only the enormous load on the service from legitimate It was also insufficient to prevent depletion.”
This is why OpenAI has become a paying customer of the Cloudflare service after being a free user for over five years.
With Cloudflare expecting $1.28 billion in revenue this year, some might argue that the $1 million deal with OpenAI won’t be a big change. But management comments on the latest earnings call show that AI is indeed driving meaningful growth for cloud infrastructure companies. Cloudflare CEO Matthew Prince pointed out while answering analyst questions at the company’s May earnings call.
I think AI surprised us last quarter in terms of positive impact, and it continues to surprise us. We’ve seen significant growth of over 20% in revenue from AI companies… from the large AI companies that serve us. Not just one or two, but from big to small.
It’s no surprise that AI companies are increasingly adopting Cloudflare’s products. After all, users need to be connected to the internet to access generative AI applications like ChatGPT, so they need to have a fast connection so that queries can be addressed quickly. Additionally, the network must be reliable and secure to avoid fraudulent activity. This is where Cloudflare comes into play. Its extensive server network helps improve the performance, reliability and security of Internet networks.
Given that the company controls a whopping 38% of the global content delivery network market, it is well positioned to capitalize on the growing adoption of generative AI, a market projected to grow 34% annually through 2030. . More importantly, Cloudflare is already pulling strings to make the most of this rapidly growing opportunity.
The company now offers the Cloudflare One Secure Access Service Edge (SASE) platform for generative AI applications. Cloudflare One for AI claims to “enable businesses to safely and reliably use the latest generative AI tools without putting intellectual property or customer data at risk.” Cloudflare executives, citing a KPMG study, noted that cybersecurity and data privacy are key concerns for U.S. executives looking to deploy generative AI.
As a result, the introduction of generative AI will ideally expand the company’s addressable market, which should reach an already staggering $146 billion in 2023, giving Cloudflare a huge growth opportunity. You may be trying to use It’s worth noting that Cloudflare’s addressable market has exploded. That’s a 4.6x increase since going public in 2019, and the company expects that to jump to $204 billion by 2026.
Stock price is high, but it seems reasonable for AI play
Cloudflare now has a 21x price-to-sales ratio. this is, S&P500has a sales multiple of 2.5. However, compared to the likes of Cloudflare, Cloudflare looks like a compelling AI stock. Nvidia (NVDA 0.09%)sales are now 39 times higher. More importantly, Cloudflare is expected to see significant growth in the future, and he falls far short of Nvidia in that respect.
| current year | next year | 2 years ahead | |
|---|---|---|---|
| Cloudflare revenue (estimated) | $1.28 billion | $1.67 billion | $2.16 billion |
| Revenue growth (YoY) | 31% | 30% | 29% |
| Nvidia Earnings (Estimated) | $42.8 billion | $51.6 billion | $63.7 billion |
| Revenue growth (YoY) | 59% | twenty one% | twenty three% |
Source: YCharts.YOY = YoY change.
Nvidia is becoming an AI pioneer. The pervasiveness of this technology relies on the company’s graphics cards, which are also widely deployed for AI model training and inference. That’s why NVIDIA expects revenue to rise 64% year over year to his $11 billion this quarter, as companies line up to buy the company’s chips.
At the same time, the above discussion suggests that even Cloudflare could play an important role in AI adoption. Additionally, as we saw above, the company is positioned in a large market to serve, with annual revenue expected to reach his $5 billion by 2027. Given the huge revenue opportunities and catalysts available, it’s no surprise that Cloudflare hits that target. such as AI.
If Cloudflare hits $5 billion in annual revenue in five years and trades at a discount of 15 times its current revenue, its market cap could reach $75 billion. That’s more than three times the current market cap, so growth investors looking for a relatively cheap alternative to AI-powered Nvidia should consider buying before Cloudflare soars.
Hirsch Chohan has no positions in any of the stocks mentioned. The Motley Fool has positions in his Cloudflare and Nvidia, and Cloudflare and he recommends Nvidia. The Motley Fool has a disclosure policy.
