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When Goldman Sachs speaks, Wall Street listens. When the prestigious investment bank executes a rare double upgrade – jumping from “Sell” to “Buy” – it’s time to pay very close attention.
That’s precisely what happened with Cloudflare (NET), an internet infrastructure and security company. Valued at a market capitalization of $39 billion, Cloudflare has successfully positioned itself as a key player in the artificial intelligence (AI) revolution.
Goldman’s dramatic shift in stance, skipping right over the neutral “Hold” rating, signals a transformation in Cloudflare’s market position and growth trajectory as we head into 2025. Let’s examine what’s driving this dramatic change in sentiment and whether Cloudflare truly deserves a spot in your tech portfolio.
Why Is Goldman Sachs Bullish on Cloudflare Stock?
According to a report from Investing.com, Goldman Sachs recently issued a double-upgrade on Cloudflare while setting a new price target of $140, up from a previous target of $77. Cloudflare stock currently trades near $115.
The upgrade is based on two key catalysts expected in 2025: improving sales and marketing productivity in enterprise platform sales, and growing traction in developer services products. Goldman analysts particularly emphasized Cloudflare’s edge network architecture as ideally positioned for AI inferencing workloads.
This rating shift reflects Goldman’s broader observation that platform-focused security companies, like Cloudflare, outperform point-product vendors as CIOs prioritize platform consolidation in the current economic environment.
Is the AI Stock a Good Buy Right Now?
Cloudflare is a cloud services company that is the invisible backbone of internet security and performance. Think of it as a high-tech traffic cop for websites and applications – it protects digital platforms from cyberattacks, makes them load faster, and ensures they stay reliable even during massive traffic spikes.
Cloudflare offers an integrated platform for businesses that handles everything from content delivery and load balancing to zero-trust security and developer tools. Its edge computing platform, Workers, allows companies to run code closer to users for better performance. With recent expansions into AI inference and storage solutions, Cloudflare has evolved from a simple security provider to a comprehensive cloud platform that powers and protects a sizeable portion of the internet.
In the third quarter of 2024, Cloudflare increased its revenue by 28% year-over-year to $430.1 million. Importantly, it added 219 new large customers (defined as those paying over $100,000 annually), a quarterly record for the company. It ended Q3 with 3,265 large customers, up 28% year over year, as 35% of Fortune 500 are now Cloudflare customers.
Cloudflare is rapidly positioning itself in the AI inference market, landing its first multimillion-dollar Workers AI contract. This $7 million deal with a growing AI company saw 2x performance improvements over traditional cloud providers. This validates Goldman’s thesis that Cloudflare’s edge network architecture is ideally suited for AI workloads.
With a gross margin of 78.8% and an operating margin of 14.8%, Cloudflare reported free cash flow of $45.3 million in the September quarter. Analysts tracking the tech stock forecast its free cash flow to grow from $160 million in 2024 to $223 million in 2024 and $325 million in 2026.
Despite its stellar growth estimates, NET stock is quite expensive, priced at more than 100x forward FCF.
What Is the Target Price for NET Stock?
During the Q3 earnings call, Cloudflare’s management team emphasized that sales productivity has returned to 2022 peak levels, shifting focus to enterprise customers with higher quotas. Nearly 70% of new sales hires in 2024 were in the enterprise segment, compared to just 40% in previous years.
However, the company’s dollar-based net retention dropped to 110%, down two percentage points quarter-over-quarter. While customer churn remains low, the shift to larger “pool of funds” deals (now 10% of new bookings, up from 1% last year) is affecting short-term metrics.
Out of the 29 analysts covering NET stock, 10 recommend “Strong Buy,” one recommends “Moderate Buy,” 15 recommend “Hold,” one recommends “Moderate Sell” and two recommend “Strong Sell.” The average target price for Cloudflare stock is $99.50, 14% below the current trading price.
