What Happened?
Shares of internet security and content delivery network Cloudflare (NYSE: NET) jumped 20.1% in the afternoon session after the company reported impressive fourth-quarter results, which exceeded analysts' billings expectations. Revenue also beat, with 28% year-on-year growth accelerating from 27% last quarter, something that the market tends to reward. The top line benefited from strong wins in the enterprise segment as the number of large customers kept pace with the sales growth while the large customer count (1m+ customers) grew even faster at 47% y/y. This raised the total enterprise revenue mix to 69%, up from 66% in the same period last year.
Cloudflare's AI business is also living up to the hype, driving strong adoption of its Workers platforms, as the company won several large enterprise AI deals during the quarter. It wasn't just top line, either, with operating profit beating handily. Lastly, we were happy with full-year revenue guidance, which exceeded expectations. Overall, this was a very good quarter.
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What The Market Is Telling Us
Cloudflare’s shares are quite volatile and have had 17 moves greater than 5% over the last year. But moves this big are rare even for Cloudflare and indicate this news significantly impacted the market’s perception of the business.
The previous big move we wrote about was 10 days ago when the stock gained 9.4% as the debate around the future of AI continued following the unveiling of DeepSeek. The market is recalibrating and rotating to stocks that are not only more insulated if DeepSeek prevails in the AI arms race but to stocks that may actually benefit no matter who wins that race. The proliferation of AI will be a general tailwind to demand for cybersecurity, big data, and automation software. For example, AI can make bad actors better and make the search for vulnerabilities faster. This means that enterprises will need more of what CrowdStrike, Zscaler or Cloudflare offer.
Additionally, more data is only valuable if the mountains of numbers, text, and videos can lead to actionable insights. AI can do exactly that, meaning that enterprises will get more value from platforms like Snowflake and MongoDB. Similarly, AI can make automation software more valuable by making it more adaptive, which means that customers can extract more value from platforms like ServiceNow and Appian.
Cloudflare is up 50.2% since the beginning of the year, and at $169.06 per share, has set a new 52-week high. Investors who bought $1,000 worth of Cloudflare’s shares 5 years ago would now be looking at an investment worth $9,304.
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