Cloudflare offers 'one of the most compelling secular stories', MS upgrades

Investing.com -- Cloudflare (NYSE: NET) is “one of the most compelling secular stories” within the software sector, Morgan Stanley (NYSE: MS) analysts said Monday, upgrading the stock from Equal Weight to Overweight. The Wall Street firm also lifted its price target on Cloudflare from $92 to $130, implying over 22% upside from current levels.

Cloudflare stock jumped more than 6% after Monday market open.

According to Morgan Stanley, the cloud services provider is poised for sustained, if not accelerated, revenue growth in the coming years due to various factors, including its role in Edge AI and multiple product cycles.

“Cloudflare remains one of the most compelling secular stories in our software coverage universe, given a large TAM (total addressable market), a highly scalable network architecture and emergence as a potential GenAI enabler as organizations look to adopt and experiment with LLMs,” analysts led by Hamza Fodderwala said.

They note that Cloudflare is also strategically positioned to capture market share in the top two Chief Information Officer (CIO) spending priorities, Security and AI/Machine Learning.

Morgan Stanley highlights Cloudflare's potential to enable AI at the network edge, which is beneficial for cost, latency, and data security reasons. Cloudflare Workers AI, a serverless GPU-powered platform, is already showing solid demand, with more than 2 million developers using the platform.

Cloudflare's role in encrypting AI queries for Apple (NASDAQ: AAPL) Intelligence could contribute an additional 2-3 percentage points to revenue growth in the years 2026-2028.

The company is also starting to monetize a broader platform that spans security, networking, AI, and application services. Analysts expect that Cloudflare's SASE and Developer/AI products, which currently represent less than 20% of revenue, will grow to account for over 40% by 2028, driving long-term revenue growth of 25-30%.

Furthermore, analysts point out the impact of seasoned enterprise sales leadership in driving larger deals.

With the addition of industry veterans like Chief Revenue Officer Mark Anderson and Head of Product CJ Desai, Cloudflare is expected to enhance its strategic selling motion to fully capitalize on its large customer base, which includes over 30% of the Fortune 500.

In summary, with multiple product cycles underway, increasing contributions from Edge AI, and a robust enterprise sales force, Morgan Stanley believes that “all the cards are aligned for a strong 2025 for Cloudflare with revenue growth potentially accelerating throughout the year.”

“This should sustain a premium multiple on higher estimates, in our view,” they added.

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