What Happened?

Shares of internet security and content delivery network Cloudflare (NYSE:NET) jumped 6.8% in the morning session after Morgan Stanley analyst Hamza Fodderwala upgraded the stock's rating from Equal Weight (Hold) to Overweight (Buy), as he believes the company (NET) deserves a premium growth valuation, given the potential for acceleration of top-line growth. Some factors driving the optimistic growth forecast include 1) multiple product cycles, 2) improving sales execution, and 3) top-line tailwinds as an Edge AI network. 

Contributing to the bullish thesis, the analyst also cited the partnership with Apple Intelligence, where NET is helping to encrypt AI queries for hundreds of millions of devices. He believes the partnership "has the potential to contribute 2-3pts to revenue growth in 2026-28." 

The points raised by Fodderwala align with some of the updates provided by the company during the last earnings, especially regarding product innovation, which the market might need help to evaluate. For example, following the introduction of Apple Intelligence, there are valid concerns regarding Apple's ability to handle privacy, security, and compute capacity-related issues as iPhone users adopt the feature. Cloudflare excels in these areas by providing solutions like Workers AI, which allows customers to run models on the Cloudflare network.

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What The Market Is Telling Us

Cloudflare’s shares are quite volatile and have had 15 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 11 days ago when the stock gained 7.7% on the news that Oppenheimer maintained a Buy rating on the stock with a $110 price target. This is the latest in a string of positive sell-side notes after a strong quarter. For example, a note from Morgan Stanley last week called out an exciting 2025, saying that "a ramping salesforce, new leadership and growing contribution from Workers/Edge AI could drive upside to estimates". 

Separately, data analytics software provider Snowflake reported impressive third-quarter results, which surpassed analysts' revenue, profit, and earnings expectations. The strong quarter is boosting sentiment in the software as a service (SaaS) space. 

Separately, cybersecurity software platform Palo Alto Networks reported solid third-quarter results, which beat across most of the key operating metrics. Remaining performance obligations (RPO - a leading revenue indicator), annual recurring revenue (ARR), and margins all exceeded Wall Street's estimates. This shows that spending on cybersecurity is healthy.

Cloudflare is up 34% since the beginning of the year, and at $106.37 per share, it is trading close to 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 $5,616.

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