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.

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However, the market’s focus has now turned to tariffs. Consequently, a fair few AI-related stocks have pulled back by 25% or more. I think this presents long-term buying opportunities.

One under-the-radar growth stock that I’ve been considering is Cloudflare (NYSE: NET). The share price is down 37% in two months, giving the tech firm a market-cap of $37bn.

Improving internet security and performance

Cloudflare operates an edge computing network, with servers in more than 335 cities around the world. Put simply, it helps websites load faster while enhancing security. 

So when you visit a website that uses Cloudflare (millions do), the request goes through its network, which then blocks harmful traffic (like hackers or bots) and speeds up content delivery.

Its network can reach approximately 95% of the world’s internet-connected population within 50 milliseconds, while blocking over 200bn cyber threats daily. Today, the company is providing critical digital infrastructure for nearly a quarter of all internet traffic!

Very strong growth

In 2024, Cloudflare’s revenue grew 29% year on year to $1.7bn. Customers spending more than $1m a year on its platform rose to 173, up 47%.

Operating cash flow surged 49% to $380.4m, while the free cash flow margin improved from 9% to 10%. However, Cloudflare remains unprofitable under standard accounting due to heavy investments and stock-based compensation. 

Looking ahead, management expects the top line to grow 25% to around $2.1bn this year. And analysts forecast revenue will jump to $3.4bn by 2027, with profits growing strongly by then.

Meanwhile, the company has set an ambitious goal to reach $5bn in annual recurring revenue by 2028.

AI inference opportunity

Cloudflare is strategically positioning itself as a key player in AI inference with its Workers AI platform. This serverless solution enables developers to run machine learning models directly on Cloudflare’s global edge network, bringing AI capabilities closer to end-users.

Inference is where a trained AI model processes new data to generate outputs. The firm thinks more of these inference workloads will start moving to the edge.

Indeed, analysts at Bank of America recently said that Cloudflare is well-positioned to become “the leader in AI-as-a-service”. And they see revenue growing more like 30% annually over the next three years.

As such, the bank nearly tripled its share price target, from $60 to $160!

Very high valuation

Cloudflare isn’t optimised for profits yet, as it’s still focused on revenue growth. But even on this basis, the forward-looking price-to-sales ratio is currently around 18.

The risk with this hefty valuation is that Cloudflare’s future growth might fall short of expectations. Especially if the surge in AI agents and inference workloads doesn’t materialise as projected.

Foolish takeaway

With much of its global infrastructure now built out, Cloudflare’s free cash flow is projected to rise to around $546m by 2027, up from $167m last year. And it now has a significant growth opportunity with AI inference/agents.

I’m considering a starter investment here. But I will keep it small and look to build out my position on dips over time due to the steep valuation.

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