TSX drops after Canadian index edges higher in prior session
Investing.com -- Jefferies maintained its Hold rating on Cloudflare after a solid third quarter that showed accelerating revenue growth but also a dip in margins and the departure of a top executive.
Cloudflare’s third-quarter revenue rose 31% from a year earlier to $562 million, its strongest beat in nearly four years, driven by large enterprise customers and the company’s Workers platform.
Jefferies said the company’s improving sales execution and broad product portfolio support management’s goal of reaching $3 billion in annualized revenue by late 2026.
However, the brokerage said the stock’s valuation, at 33 times estimated 2026 revenue, remains expensive, and margins are under pressure.
Gross margin fell to 75% from 76% in the prior quarter, reflecting higher costs tied to customer conversions and growth in the lower-margin Workers segment. Non-GAAP operating margin was 15.3%, above consensus but below longer-term targets.
Jefferies also noted the exit of CJ Desai, Cloudflare’s president of product and engineering, who is leaving to become a public-company CEO.
The firm said his departure is a setback given his role in expanding enterprise traction, though it expects an external replacement soon.
The note highlighted strong sales productivity, rising partner contributions, and robust free cash flow of $72 million, or a 13% margin. Jefferies said Cloudflare remains well positioned for AI and cybersecurity demand but that its premium valuation limits near-term upside.