Back in April, I snapped up a handful of shares when the stock market suddenly started crashing. These included Nvidia (up 75% since) and Shopify (+68%).
Beating this pair, though, is Cloudflare (NYSE: NET), which has nearly doubled since I invested three months ago. Unfortunately, I only had a nibble, just enough to get some skin in the game.
However, I’m keen to add to my position in Cloudflare, whenever its shares next sell off aggressively. Here’s why I’m bullish on this tech company over the long term.
What is Cloudflare?
The company’s mission is to help build a better internet (faster, safer, and more reliable). It does this through data centres in around 350 cities across more than 125 countries, including mainland China, reaching 95% of the world’s internet-connected population within 50 milliseconds.
Cloudflare also provides cybersecurity by protecting from nefarious activities like DDoS (distributed denial of service) attacks and malicious bots. Its network manages and protects traffic for 20% of the web, blocking around 247bn cyber threats daily.
Because Cloudflare’s services run silently in the background, it’s often called the most important internet company you’ve never heard of.
Massive AI opportunity
Cloudflare’s global reach means it processes data closer to where applications are (edge computing). This is likely to become increasingly important as AI inference (the bit that happens after training) requires more compute demand.
In 2023, the company introduced Workers AI, a pay-as-you-go service allowing developers to run open-source AI models at the edge. In Q1, the number of inference requests powered by its serverless GPU network rocketed nearly 4,000% year on year.
We believe that a lot of AI inference is going to run on our network. A lot of inference is going to run on your phone. A lot of inference is going to run in your driverless car. But there will always be AI models that are too big or consume too much power in order to run locally, and in those cases, the next best place for those models to run is in the network itself.
Cloudflare CEO Matthew Prince, speaking to Investor’s Business Daily
Cloudflare also recently announced a potentially game-changing pay-per-crawl feature. This means website owners can choose if they want AI crawlers accessing their content (text, articles, and images), and if so, decide how AI firms can use and pay for it.
In future, billions of AI agents — intelligent software bots that can take actions autonomously — are going to be crawling all over the internet. Management sees a massive opportunity to act as a gatekeeper between AI agents and websites.
Watching and waiting
After its surge, the stock is trading at 38 times sales. At this super-rich valuation, a lot of future growth is already baked in. If growth rates end up disappointing, the stock could sell off heavily.
Also, the company faces a lot of competition, including Amazon Web Services and Zscaler.
Nevertheless, Cloudflare has grown revenue at an impressive five-year compound annual growth rate of roughly 40%. If it can monetise AI bots and agents flooding the web, then high growth could continue for many more years.
Cloudflare is benefitting from multiple high-growth markets (cloud security, AI, Internet of Things). Whenever the stock pulls back sharply, I will start adding to my holding immediately.
