Cloudflare NET shares have surged 43.1% over the past year, outperforming the Zacks Computer and Technology sector and the S&P 500’s return of 33.1% and 25%, respectively. The stock has also outperformed industry peers, including CrowdStrike CRWD, DataDog DDOG and Fastly FSLY.

With such a stellar performance, investors are left wondering — Should they double down on NET, or is caution the wiser path?

Innovative Products Propel Cloudflare’s Prospects

Cloudflare’s solid performance is driven by the innovations it is bringing into the content delivery space. NET’s mission to build a better Internet has struck a chord with its diverse customer base, ranging from small businesses to large enterprises. NET’s expansive global network, along with its emphasis on performance and security, has established it as a leader in the industry.

One-Year Price Return Performance

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In its third-quarter 2024 earnings, NET reported that it was able to secure 219 large customers who pay more than $100,000 annually. The impressive customer acquisition by Cloudflare is also supported by a strong net retention rate, reflecting strong customer loyalty and NET’s ability to upsell additional services. Additionally, Cloudflare directly serves 35% of Fortune 500 companies, providing access to a high-quality and prestigious customer base.

Cloudflare has also made significant strides in integrating artificial intelligence (AI) into its solutions. Alongside, numerous AI-based product launches, NET also collaborated with the largest players in the AI space, such as NVIDIA and Microsoft, throughout the past year. Strengthening portfolio and strategic partnerships ensure that NET’s products remain at the forefront of innovation, attracting investors’ attention to the stock.

Resilient Financial Performance of Cloudflare

Cloudflare’s strong financials underscore its operational resilience. The stock has surpassed the Zacks Consensus Estimate for earnings in the trailing four quarters, the average surprise being 25.5%.

Find the latest EPS estimates and surprises on Zacks Earnings Calendar.

Cloudflare reported third-quarter 2024 non-GAAP earnings of 20 cents per share. The bottom line increased 29.4% year over year. NET’s third-quarter revenues of $430.1 million increased 28.2% year over year.

Analysts remain optimistic about the company’s future. The Zacks Consensus Estimate for 2025 suggests robust growth in revenues and earnings.

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Cloudflare’s Valuation: A Reason for Concern

Although Cloudflare has performed exceptionally and has strong fundamentals, its current valuation raises concerns. While NET has shown impressive growth in customer acquisition and product innovation, such momentum has already been priced into the stock’s valuation, leaving limited room for error.

At present, NET appears overvalued from a price-to-sales perspective. The stock is currently trading at a forward 12-month P/S ratio of 19.04, significantly higher than the Zacks Internet – Software industry average of 3.02. This premium valuation raises concerns about the stock’s sustainability, signaling potential downward risk.

Forward 12-Month P/S Multiple

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Conclusion: Hold Cloudflare Stock for Now

While Cloudflare's recent stock surge and strong market position are encouraging, significant volatility and high valuation warrant caution.

Therefore, we believe new investors should wait for a better entry point and existing investors should retain Cloudflare stock, which currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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Fastly, Inc. (FSLY) : Free Stock Analysis Report

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