Cloudflare Earnings: Top-Line Acceleration More Than Offsets Rising Costs

Key Morningstar Metrics for Cloudflare

• Fair Value Estimate: $185
• Morningstar Rating: ★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Very High

What We Thought of Cloudflare’s Earnings

Cloudflare NET reported solid third-quarter results with the firm’s sales growth accelerating to 31% while its adjusted operating margins expanded 50 basis points to 15.3%. The firm’s channel partner sales spearheaded the top line, growing 68% year over year, making up 27% of total sales in the quarter.

Why it matters: Cloudflare’s business is firing on all cylinders. We particularly like the firm’s continued march upmarket, with sales from large customers, defined as those spending more than $100,000 on the firm’s products, growing 42% and constituting 73% of total sales.

• Our optimism on a larger enterprise footprint is underpinned by our view that enterprise customers offer more attractive upselling opportunities, as well as being more churn-resistant than smaller businesses.
• This strong upselling velocity within large accounts was evidenced by the firm’s net retention metric, which expanded to 119%, its highest level in the last 11 quarters.

The bottom line: We are raising our fair value estimate for narrow-moat Cloudflare to $185 from $130 primarily due to an increase in our top-line projections for the firm. Despite our material fair value estimate hike, we continue to view shares as overvalued.

• A key driver behind our updated forecast was continued growth in the firm’s remaining performance obligations, or revenue it will recognize in the future. RPO grew a whopping 43%, accelerating year over year and sequentially, setting up a further top-line acceleration in 2026.
• At the same time, however, we do note that the firm’s cost structure is also being lifted up through continued investments in artificial intelligence. Evidence of this increase is most apparent in the firm’s gross margins, which contracted 370 basis points year over year.

Coming up: The firm’s fourth-quarter outlook calls for sales and adjusted margins of $589 million and 14%, respectively, at the midpoint of guidance. We view these targets as conservative and model upside to both numbers.