SAN FRANCISCO, CA – July 27, 2025 – Cloudflare, Inc. (NYSE: NET), a prominent force in the connectivity cloud sector, continues to draw investor attention. However, a deep dive into its financials reveals a concerning pattern: the company has reported negative operating income for over seven years, dating back to at least 2018. This prolonged unprofitability is casting a long shadow over its growth story, prompting questions about its long-term sustainability and immediate valuation in a volatile technology market.
Introduction: Growth at a Cost
In the rapidly evolving landscape of cloud services and cybersecurity, Cloudflare has carved out a niche with its innovative approach to internet infrastructure. Yet, this innovation has come at a significant cost. The company’s financial records, spanning back to its earliest available data in 2018, show a consistent trend of negative operating income across every single quarter and year.
The first-quarter 2025 results, released in May, initially brought some cheer with robust revenue growth of 27% year-over-year, reaching $479.1 million and surpassing analyst expectations. However, this growth narrative is consistently overshadowed by persistent operating losses. The trailing twelve-month (TTM) operating income stands at a stark -$153.5 million. This pattern of negative operating income is clearly evident in annual figures: -$155 million in 2024, -$185 million in 2023, -$201 million in 2022, and -$128 million in 2021. These figures highlight ongoing challenges in achieving operational profitability despite consistently scaling revenues.
Further intensifying scrutiny on Cloudflare’s financial health are its TTM return on equity (ROE) of -5.73% and TTM return on tangible assets (ROTA) of -2.32%. These metrics underscore a long history where the company’s operating expenses have consistently outpaced its gross profits, largely driven by substantial investments in research, development, and infrastructure.
Business Overview and Recent Performance: A Deep-Seated Issue
Cloudflare’s business model is built around providing a comprehensive suite of services designed to enhance website performance, security, and reliability. Its expansive global network, operating across more than 300 cities, processes a massive volume of internet traffic, effectively positioning the company as a critical gatekeeper for digital operations worldwide.
In Q1 2025, Cloudflare reported non-GAAP income from operations of $56.0 million, which represented 12% of its revenue—a notable improvement that suggests more disciplined cost management. Nevertheless, GAAP operating losses persisted at -$53.2 million, extending a trend that has been in place since the company’s pre-IPO days.
This enduring negativity in operating income is not a recent development. Quarterly data consistently reveals losses: -$53.2 million in Q1 2025, -$34.7 million in Q4 2024, and extending all the way back to -$36.5 million in Q3 2018. Over the past seven years, Cloudflare has never once achieved positive operating income, accumulating billions in cumulative losses as it pursued aggressive growth strategies.
Qualitative Strengths: A Compelling But Costly Narrative
Despite the prolonged operating losses, Cloudflare possesses several compelling qualitative strengths. The company benefits from a durable competitive advantage rooted in powerful network effects, valuable intangible assets, and inherent cost advantages. Its expansive infrastructure, which handles approximately 20% of global internet traffic, creates a self-reinforcing moat where increased usage continually enhances data insights and the efficacy of its services. This is evident in its leadership positions in content delivery networks (CDN) and zero-trust security, where its technological expertise allows for superior performance at lower costs compared to many rivals. For example, Cloudflare’s Workers AI platform has recently driven significant deals, including its largest contract ever, exceeding $100 million, in Q1 2025.
Furthermore, Cloudflare operates with relatively low capital requirements for growth, largely due to its software-centric model, which enables high asset turnover. While infrastructure expansions still necessitate capital expenditures (CapEx) – amounting to $92.9 million in Q1 2025 – a significant portion of its free cash flow remains available for reinvestment without demanding excessive tangible assets. This is supported by the firm’s ability to efficiently scale its developer tools and AI services, allowing for rapid iteration and deployment, though it must be noted that these investments contribute to the ongoing negative operating income.
The inherent resilience of the cloud connectivity industry also serves as a pillar of Cloudflare’s appeal. Demand for secure, high-performance internet solutions remains robust and continues to grow, fueled by global digital transformation, the rise of remote work, and widespread AI adoption. The sector has demonstrated strong resistance to technological disruptions, with Cloudflare benefiting significantly from trends like edge computing and AI inference. Despite various macroeconomic headwinds, the company’s revenue per user and customer retention rates have remained strong, underscoring the essential nature of its offerings. However, the persistent operating losses raise serious concerns about the sustainability of this resilience if profitability continues to remain elusive.
Competitively, Cloudflare operates within a concentrated landscape dominated by a few large players. Key rivals include Akamai (strong established presence but slower innovation); Fastly (a focus on edge computing but smaller scale); and hyperscalers such as Amazon CloudFront, Google CDN, and Microsoft Azure (possessing vast resources but less specialized in security/performance). Cloudflare differentiates itself through its integrated developer platform and SASE (Secure Access Service Edge) capabilities, highlighted by the signing of its longest-term SASE contract in Q1 2025. This strategic positioning allows it to capture market share from incumbents, particularly within the enterprise and government sectors. Yet, the long history of negative operating income may deter investors who are wary of prolonged unprofitability.
Valuation Assessment: Signals Point to Selling
Valuation remains a hotly debated aspect of Cloudflare’s investment story, particularly in light of its unbroken streak of negative operating income since 2018. The analysis employed two distinct methods to estimate intrinsic value, both of which strongly suggest the stock may be overvalued.
Intrinsic Value Results for Cloudflare, Inc.
Stock Ticker | Valuation Method | Intrinsic Value per Share | Price with 40% Margin of Safety | Action |
NET | Buffett-Inspired | $10.29 | $6.17 | Consider Selling |
NET | McGrew Growth | $49.40 | $29.64 | Consider Selling |
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The Buffett-Inspired Valuation projects trailing twelve-month free cash flow at a constant 3% growth for 10 years, followed by a 2.5% perpetual growth rate, all discounted at 8%. This methodology yields an intrinsic value per share of $10.29, with a 40% margin of safety price of $6.17.
The McGrew Growth Valuation, which is tailored for high-growth stocks, utilizes a 40% initial growth rate (based on recent free cash flow trends) that declines to 6% by Year 10. This method results in an intrinsic value of $49.40 and a margin of safety price of $29.64.
Considering that Cloudflare’s stock closed at $198.42, both valuation methods strongly suggest that the stock warrants consideration for selling, as their calculated intrinsic values fall well below 80% of the current market price.
These calculations assume an 8% discount rate, reflecting the opportunity cost of capital, and a conservative 2.5% perpetual growth rate, aligning with long-term economic expectations. Adjusted net debt is considered zero, given Cloudflare’s cash-rich balance sheet. Limitations of these models include the impact of historical negative free cash flow on CAGR calculations, which necessitated using a proxy for recent growth in the McGrew method.
Tax Implications: The One Big Beautiful Bill Act
The One Big Beautiful Bill Act, signed into law on July 4, 2025, includes provisions for full expensing of R&D expenditures (including software development) and 100% bonus depreciation for qualified property like data center equipment. Based on Cloudflare’s TTM R&D of $448 million and CapEx of $268 million, the bill could provide potential tax savings of approximately $109 million annually at a 21% effective tax rate, assuming prior amortization rules applied (80% extra deduction on R&D and 60% on CapEx). However, due to Cloudflare’s ongoing net losses, this benefit would primarily manifest as increased net operating loss carryforwards, enhancing future cash flow once the company achieves profitability. Immediate extra annual cash flow is minimal (near $0) given current negative income and low tax payments ($5 million TTM).
Management Outlook: Cautious Optimism Amidst Unclear Profitability
Management’s outlook, as articulated during the Q1 2025 earnings call, reflects a tone of cautious optimism against the backdrop of persistent losses. CEO Matthew Prince emphasized the momentum in large deals and innovation, stating, “We have the scale, the technology, and the team to capture the massive opportunity ahead.” CFO Thomas Seifert highlighted a prudent approach amidst global uncertainties, with guidance reflecting discipline in scaling operations. The company anticipates generating two-thirds of its free cash flow in the second half of 2025, with a focus on go-to-market expansions and developer platforms. This outlook aligns with broader industry trends, where AI and security demands are expected to drive sustained growth, though external volatility could impact execution. Critically, management has yet to provide a clear timeline for achieving positive operating income, a significant concern given the multi-year track record of losses.
Analyst Sentiment: A Mixed Bag of Bullishness and Caution
Wall Street analysts currently hold a “Moderate Buy” consensus rating for Cloudflare, based on an average price target of approximately $160, though recent updates show some targets as high as $225. This average, however, still implies a significant downside from the current trading price around $198. Recent reports from firms like Wells Fargo and RBC Capital have raised their price targets, with Wells Fargo moving to $225 and RBC Capital to $210, both maintaining “Overweight” or “Outperform” ratings. These bullish sentiments often cite Cloudflare’s robust revenue growth, high gross profit margins, strong enterprise segment wins, and its strategic position in AI and cybersecurity infrastructure. Some analysts view the stock as a key player in the “Gen-AI video tools” and content delivery, anticipating strong future sales and earnings receipts despite current profitability concerns.
However, not all analysts share the same level of enthusiasm, and the consensus disguises underlying concerns. While there are a considerable number of “Buy” and “Strong Buy” ratings, there’s also a notable portion of “Hold” ratings, and a few “Sell” or “Strong Sell” recommendations. For instance, Robert W. Baird recently boosted its target to $175 but maintained a “Neutral” rating, suggesting potential downside from current levels. Similarly, DZ Bank downgraded the stock from “Strong Buy” to “Strong Sell” with a target of $170, highlighting significant valuation risks. Bears frequently point to Cloudflare’s high valuation multiples (e.g., EV/Sales exceeding 10x and a forward P/E ratio around 200x), which make it vulnerable to market corrections and raise questions about the long path to sustained profitability. The recent brief outage on July 14, though quickly resolved, also serves as a reminder of operational challenges that could impact performance.
Overall, while Cloudflare’s innovative offerings and growth potential are well-recognized, the disparity in analyst price targets and ratings reflects a broader debate about whether the company’s current valuation fully accounts for its persistent operating losses and the inherent risks of its high-growth strategy. Investors are urged to look beyond the general “Moderate Buy” consensus and consider the underlying assumptions of individual analyst models, particularly given the stock’s significant run-up year-to-date.
Conclusion: Weighing Promise Against Prudence
Looking ahead, Cloudflare’s trajectory hinges on its ability to successfully execute its AI and security initiatives amidst intense competitive pressures. The upcoming Q2 2025 earnings release on July 31 could provide further insights, potentially validating its premium valuation if growth significantly accelerates, or exacerbating concerns if operating losses persist. Investors should carefully weigh the firm’s competitive moat and industry resilience against its long and consistent history of negative operating income, especially considering the tech sector’s sensitivity to economic shifts. With shares significantly up year-to-date, the debate over Cloudflare’s true worth persists, blending promise with a strong call for prudence in an uncertain market.
Buy or Sell: Cloudflare Stock Considerations
Deciding whether to buy or sell Cloudflare (NET) stock involves weighing its significant growth potential and strategic market position against its persistent unprofitability and high valuation. Here’s a breakdown of the positive and negative points:
Why Cloudflare Might Be a Buy (Positive Points):
- Robust Revenue Growth: Cloudflare consistently demonstrates strong top-line growth, with a 27% year-over-year increase in Q1 2025 and a 5-year CAGR of 40%. This indicates strong demand for its services.
- Strong Competitive Moat: The company benefits from powerful network effects and a global infrastructure that handles approximately 20% of internet traffic, making its services sticky and difficult for competitors to replicate.
- Leadership in Critical Areas: Cloudflare holds strong positions in content delivery networks (CDN), zero-trust security, and edge computing, all of which are growing and essential for modern internet operations.
- Significant AI Opportunity: Cloudflare is making aggressive strides in AI infrastructure, particularly with its Workers AI platform. It reported a massive 4,000% year-over-year rise in Workers AI inference requests in Q1 2025 and is winning large enterprise AI deals. This positions the company to capitalize on the booming AI market.
- High Gross Profit Margins: Cloudflare maintains impressive TTM gross profit margins of nearly 77%, indicating that its core services are highly efficient once sold.
- Relatively Low Capital Requirements for Growth: Its software-centric model means it doesn’t require excessive tangible assets to expand, allowing free cash flow to be reinvested.
- Increasing Large Customer Adoption: The company is successfully attracting and retaining large enterprise customers, evidenced by a significant increase in clients spending over $100,000 annually and its largest-ever contract in Q1 2025.
- Long-Term Market Tailwinds: The secular trends of digital transformation, remote work, and AI adoption ensure a continuously expanding market for Cloudflare’s services.
- Potential Future Tax Benefits: The “One Big Beautiful Bill Act” could create substantial net operating loss (NOL) carryforwards from R&D expensing and bonus depreciation, which would reduce future tax liabilities once the company achieves profitability.
Why Cloudflare Might Be a Sell (Negative Points):
- Persistent Operating Losses: Cloudflare has a long-standing history of negative operating income, spanning over seven years since at least 2018. This raises fundamental questions about its path to sustained profitability.
- Negative Profitability Metrics: Metrics like TTM ROE (-5.73%) and ROTA (-2.32%) highlight the company’s inability to generate profits from its equity or assets, primarily due to high operating expenses.
- High Valuation Multiples: Despite losses, Cloudflare trades at extremely high valuation multiples (e.g., forward P/E around 200x, EV/Sales significantly above industry averages). This implies substantial future growth and profitability are already priced into the stock, leaving little room for error.
- Discrepancy with Intrinsic Value: Both Buffett-inspired and McGrew Growth valuation models suggest the stock is significantly overvalued at its current price of ~$198, with intrinsic values far lower.
- Unclear Timeline to GAAP Profitability: Management has not provided a clear timeline for achieving positive GAAP operating income, which is a key concern for investors focused on fundamental profitability.
- High R&D and Sales Expenses: While necessary for growth, heavy investments in R&D and sales continue to erode gross profits, contributing to ongoing operating losses.
- Earnings Estimate Revisions: Analysts have recently revised earnings estimates downward, and there’s a lack of upward revisions, which can be a red flag for short-term stock performance and reflects caution about converting revenue into profit.
- Competitive Pressures: While Cloudflare differentiates itself, it operates in a highly competitive market against established players and hyperscalers with vast resources.
- Limited Immediate Tax Benefit: Due to its ongoing net losses, the tax benefits from the “One Big Beautiful Bill Act” would primarily enhance future NOL carryforwards rather than providing immediate cash flow.
Could Growth in its AI Business Lead to Positive Earnings?
Yes, growth in Cloudflare’s AI business could significantly contribute to achieving positive earnings, but it’s not a guaranteed or immediate path.
Cloudflare’s AI initiatives, particularly its Workers AI platform, are showing tremendous traction, with inference requests soaring. This growth is crucial for several reasons:
- Increased Revenue and Scale: As more enterprises adopt AI, they will increasingly rely on Cloudflare’s distributed network for low-latency AI inference and related security services. This can lead to substantial new revenue streams and an expansion of its paying customer base, especially within the high-value enterprise segment. The company has already secured large AI-driven deals, indicating strong market demand for its offerings.
- Efficiency and Cost Advantage: Cloudflare’s serverless architecture and optimized GPU utilization for AI inference are designed to offer better performance and potentially lower costs compared to traditional cloud hyperscalers. If this efficiency translates into higher margins for its AI services, it could accelerate the path to overall profitability.
- Ecosystem Lock-in: By providing a comprehensive platform for AI development and deployment (including AI Gateway, Data Loss Prevention for AI, and Vectorize), Cloudflare deepens its integration with customer workflows, increasing stickiness and cross-selling opportunities across its entire suite of services.
However, the key challenge remains converting this revenue growth into sustainable GAAP profitability. Cloudflare is currently investing heavily in its AI infrastructure and R&D, which contributes to its operating losses. While AI growth can certainly drive top-line expansion, achieving positive earnings hinges on whether the rate of revenue growth from AI and other services will eventually outpace the growth in operating expenses, particularly sales & marketing and R&D. Management’s disciplined approach to cost management and focus on converting free cash flow into strategic investments are positive signs. If Cloudflare can scale its AI business efficiently and leverage its existing network without a proportional increase in costs, then its burgeoning AI segment could indeed be the catalyst that finally pushes the company into a consistently profitable position.
Quantitative Analysis: Key Financial Metrics for Cloudflare, Inc.
Metric Name | Value | Timeframe |
ROE | -5.73% | TTM |
ROE | -7.53% | Latest Year |
ROE | -20.88% | 3-Year Avg |
Return on Tangible Assets (ROTA) | -2.32% | TTM |
Gross Profit Margin | 76.89% | TTM |
Net Profit Margin | -4.62% | TTM |
Debt-to-Equity Ratio | 1.04 | Latest |
Debt-to-Cash and Equivalents | 0.77 | Latest |
Current Ratio | 3.20 | Latest |
Interest Coverage Ratio | -12.42 | TTM |
Revenue Growth Rate | 40.00% | 5-Year CAGR |
Free Cash Flow Yield | 0.27% | TTM |
Operating Margin | -8.67% | TTM |
CapEx as % of FCF | 145.77% | TTM |
Dividend Payout Ratio | 0.00% | TTM |
Book Value per Share Growth | 31.00% | 5-Year CAGR |
Share Buyback/Dilution Trends | +15.00% | 5-Year Change (dilution) |
Capital Structure | 96% Long-Term | Latest |