A couple of catalysts could spell substantial gains for Cloudflare over the next several months, according to Goldman Sachs. The firm double upgraded shares of the cloud company to buy from sell and almost doubled its price target, increasing to $140 from $77. That reflects around 30% upside ahead, as of Tuesday’s close. “Recall that our Sell thesis was predicated on post COVID normalization driving more muted revenue growth, and the company’s progress in network security (SASE) and in the enterprise taking longer and costing more than originally planned,” analyst Gabriela Borges wrote in a Wednesday note. “Cloudflare outperformed S & P 500 amid positive FCF revisions, and optimism around new leadership hires over the course of 2024. We now see several positive catalysts to drive improving fundamentals and stock outperformance in 2025.” On that note, Borges sees sales and marketing productivity improvements ahead, which she thinks should help with the company’s customer acquisition costs. She noted that a 10% cost decrease in 2025 and 2026 implies upside to revenue estimates of 4% and 7%, respectively. The analyst also pointed to a path to monetization for the company’s Act III products, which mainly focus on developer services. She believes these will likely see an inflection over the next three years as a result of artificial intelligence moving from training to inferencing use cases, among other factors. As these use cases ramp up, Borges thinks that edge computing supply and demand may be “out of balance.” However, she said the company already has the technology in place to rectify that. “There are several potential solutions to edge compute, including ongoing build outs from the hyperscalers, AI-enabled PCs with neural processing units (NPUs) that can take on inferencing queries on device, and more fiber buildouts such as via Lumen,” Borges said. “However, the CDN networks are already in place to help bring supply/demand into balance and may only need modest incremental investment to support inferencing use cases – and while early days, we think this may drive an upgrade cycle in both CDN infrastructure for classic use cases and new use cases.” The Street is pretty split on the name. While Borges’ call is among 15 analysts that have a strong buy or buy rating, another 15 of the 34 total analysts covering the stock have taken a neutral stance with a hold rating, per LSEG data. Not only that, its average target of around $99 reflects around 8% downside from Tuesday’s close. Shares jumped more than 5% in the premarket on the heels of the call. Over the past 12 months, the stock has risen more than 35%, outperforming the broader market.
