Bank of America (BofA) has shown increased optimism towards Cloudflare stock, despite valuation concerns. On Tuesday, Cloudflare’s stock saw a 4.5% rise by 10:10 a.m. ET after BofA upgraded its rating from underperform to buy, as reported by Street Insider.
BofA’s upgrade comes not from the company’s perceived role as a cybersecurity entity, but due to its artificial intelligence (AI) offerings. Although Cloudflare is traditionally viewed as a cybersecurity company, indicated by its 33% market penetration in security products, the company is increasingly engaging in AI ventures. This shift is demonstrated through its deployment of graphics processing units (GPUs) within its network, allowing customers to execute AI workloads in the cloud, as noted by industry expert Harsh Chauhan.
According to BofA, Cloudflare’s AI-as-a-service is gaining customer interest and is anticipated to be a leading product for adoption over the next year. With the expectation that Cloudflare will meet or surpass its full-year revenue guidance and potentially grow by 30% annually over the next three years, BofA has nearly tripled its price target to $160 per share.
Data from S&P Global Market Intelligence highlights Cloudflare’s 36.5% average annual revenue growth rate over the past three years. Despite not achieving profitability under generally accepted accounting principles (GAAP), the company generated $166.5 million in free cash flow last year after capital expenditures and software costs. However, with a market capitalization of $44.8 billion, the stock trades at a high multiple of 269 times trailing free cash flow and 194 times projected 2025 free cash flow, suggesting potential valuation challenges even with a 30% growth rate.
Bank of America is an advertising partner of Motley Fool Money. Rich Smith, the author, holds no positions in Cloudflare or Bank of America stocks. The Motley Fool holds positions in both companies and adheres to a disclosure policy.
