What Happened?

Shares of internet security and content delivery network Cloudflare (NYSE:NET) jumped 8.3% in the morning session after Citi analyst updated the stock's price target from $90 to $95. The analyst noted that the Q3'2024 earnings included "encouraging qualitative generative AI commentary and traction in Cloudflare's PoF (Pool of Funds) deals." Since the company reported results on November 7th, 2024 and the stock retreated, several Wall Street analysts have defended. They pointed out that the quarter was solid and that future prospects, especially the Workers Edge AI platform, are bright.

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What The Market Is Telling Us

Cloudflare’s shares are quite volatile and have had 16 moves greater than 5% over the last year. In that context, today’s move indicates the market considers this news meaningful but not something that would fundamentally change its perception of the business. 

The previous big move we wrote about was 5 days ago when the stock dropped 9.1% on the news that the company reported third-quarter earnings and provided revenue guidance for the next quarter that missed analysts' expectations by less than 1%. Billings, a key growth indicator, also missed Wall Street's estimates, although cRPO (another topline indicator) beat and accelerated in growth rate compared to last quarter. The company noted that some large deals saw delays in closing. 

Additionally, the shift towards more "pool of funds" contracts with large customers impacted the timing of revenue recognition and added noise to topline. These deals allow customers to pre-purchase credits for future use rather than locking them into stricter, longer-term contracts. It removes the friction of trying new Cloudflare products like the Workers Edge AI developer platform but also changes how revenue is accounted for, adding some variability in the near term. 

Encouragingly, Cloudflare noted that the model is expected to have a long-term positive effect on sales as the model reduces sales friction by enabling customers to have more flexibility in choosing which services they need, without committing to specific products upfront. Overall, the quarter itself was solid, but the market is focusing on the revenue guidance.

Cloudflare is up 22.3% since the beginning of the year, but at $97.07 per share, it is still trading 10.1% below its 52-week high of $107.92 from February 2024. Investors who bought $1,000 worth of Cloudflare’s shares 5 years ago would now be looking at an investment worth $5,970.

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