Cloudflare: A Promising Player in the AI Boom
Microsoft co-founder Bill Gates has declared artificial intelligence (AI) as the most revolutionary technology he has witnessed in decades. Gates’ assertion comes after witnessing ChatGPT, an AI language model, successfully tackle a college-level biology exam that included open-ended essay questions. In a recent blog post, Gates emphasized that AI will transform the way people work, learn, travel, receive healthcare, and communicate. He believes that entire industries will reorient around AI, and businesses that effectively utilize it will distinguish themselves. To capitalize on this once-in-a-generation opportunity, Gates suggests building a basket of AI stocks. This article explores why Cloudflare, a leader in developer and security services, is a worthy inclusion in that basket.
Cloudflare is a leader in developer services:
Cloudflare, a company that aims to make the internet faster and safer, offers a wide range of application, network, security, and developer services that accelerate and protect corporate software and infrastructure. With its unmatched performance and scale, Cloudflare operates the fastest cloud network and developer platform, handling approximately 20% of internet traffic. Moreover, Cloudflare’s cloud-neutral platform enhances performance and security across public clouds and private data centers, making it a valuable partner for businesses relying on cloud providers like Amazon Web Services and Microsoft Azure.
Cloudflare’s strong presence in various cloud computing verticals, including developer services, has been recognized by Forrester Research. The company was named the leader in edge development platforms, thanks to its superior product, Cloudflare Workers, and a robust growth strategy compared to its competitors. Cloudflare’s management believes that its value proposition, which combines unmatched speed and cloud-neutral technology, positions the company as a vital player in the AI value chain. To further tap into this opportunity, Cloudflare recently unveiled Workers AI, a service that enables businesses to build AI applications and run machine learning models on its network. Workers AI leverages Nvidia GPUs and is supported by other Cloudflare products, such as R2 (object storage) and Vectorize (vector database).
Cloudflare is a leader in zero trust network security:
Apart from developer services, Cloudflare has also established a strong presence in several cybersecurity markets. Forrester Research recognized the company as a leader in email security, and the International Data Corp. acknowledged its leadership in zero trust network access. Cloudflare’s immense scale, with around 20% of internet traffic flowing through its network, gives it a significant data advantage. This advantage enables the company to have deep insights into performance issues and security threats, allowing for more efficient traffic routing and effective threat mitigation.
Cloudflare’s comprehensive approach to network and security services is exemplified by Cloudflare One, a secure access service edge (SASE) platform. Cloudflare One protects and connects users to private applications, public cloud services, and the open internet. Gartner predicts that 80% of enterprises will adopt SASE architecture by 2025, up from 20% in 2021, highlighting the widespread push to modernize network security.
Cloudflare is chasing a $200 billion market opportunity:
Cloudflare estimates its addressable market to be $164 billion by 2024, with expectations of surpassing $200 billion by 2026. The majority of this market opportunity lies in developer services and network security services, where Cloudflare already holds a strong presence. The company’s potential has been recognized by Fortune, ranking Cloudflare sixth on its Future 50 List for 2023. This list evaluates the world’s largest companies based on their long-term growth prospects, and Cloudflare’s high placement is attributed to its opportunities in AI inferencing and cybersecurity.
Analysts at Morningstar project that Cloudflare’s revenue will grow by 34% annually over the next five years, a reasonable estimate considering the company’s revenue has increased by 46% annually over the past three years. With a current valuation of 23.5 times sales, Cloudflare’s stock appears reasonably priced and offers a discount compared to its three-year average of 38.7 times sales. While Cloudflare’s share price may experience volatility, patient investors comfortable with price swings should consider a small position in this growth stock, especially as part of a broader basket of AI stocks.
Conclusion:
Bill Gates’ recognition of AI as the next technological revolution has sparked interest in investing in AI stocks. Cloudflare, with its leadership in developer services and zero trust network security, stands out as a promising player in the AI boom. Cloudflare’s unmatched performance, cloud-neutral technology, and innovative offerings position it well to capitalize on the opportunities presented by AI. With a strong presence in multiple cloud computing verticals and cybersecurity markets, Cloudflare is poised for future growth. While investors should be aware of potential volatility, Cloudflare’s reasonable valuation and potential for revenue growth make it an attractive addition to a portfolio of AI stocks.
