Cloudflare shares leap as BofA double-upgrades to Buy

Investing.com -- Bank of America (BofA) analysts double-upgraded Cloudflare (NYSE:NET) to Buy from Underperform on Tuesday, a move driven by the company’s improving fundamentals and significant growth potential in AI and network security.

The company’s shares jumped more than 5% in premarket trading Tuesday.

The Wall Street firm’s analysts highlighted two main catalysts that they believe will accelerate the company’s growth: Cloudflare’s differentiated approach to AI and its momentum in network security, particularly in Secure Access Service Edge (SASE).

Cloudflare’s AI-as-a-Service (AIaaS) offering is expected to become the preferred method of AI consumption for enterprises, positioning the company as a potential leader in this space.

“AIaaS is already resonating with customers; our surveys show AI is the leading product Cloudflare customers are looking to adopt in the next twelve months (NTM), with average AI spending forecast to increase +8% to $100k per customer, or 15% of total customer spending,” BofA analysts led by Madeline Brooks said in a note.

In the network security sector, Cloudflare is demonstrating strong momentum and continues to gain market share from competitors, especially in the Secure Access Service Edge (SASE) segment. 

The company’s security products have reached 33% market penetration, and over half of new spending in the NTM is expected to be directed towards security products. This trend is likely to challenge incumbents such as Check Point Software (NASDAQ:CHKP) and Cisco (NASDAQ:CSCO) as enterprises transition to software-based security solutions.

“Given recent momentum, we are increasingly confident in NET’s ability to meet or exceed full-year (FY) revenue guidance,” analysts continued.

Alongside the upgrade, BofA significantly raised its price objective for Cloudflare stock to $160 from $60, applying a 20x multiple on calendar year 2026 estimated enterprise value to sales, up from a 10x multiple previously.

The analysts project that these developments could propel Cloudflare’s 3-year compound annual growth rate (CAGR) to 30% by 2028, up from the previous estimate of 25%.

While very bullish on NET, BofA also outlined potential risks to their thesis. The bank notes that achieving Cloudflare’s target of $5 billion in revenue by calendar year 2028 would require a reacceleration of revenue growth, which is roughly 400 basis points higher than peer group growth forecasts.

This ambitious goal demands “near-perfect go-to-market execution,” especially among enterprise customers.

Moreover, the nascent state of the AI market and pricing strategies may delay AI’s material contribution to Cloudflare’s revenues, BofA said.