Investment thesis - potential and risks:
The Cloudflare share ($NET (-4,51%) ) is considered one of the most exciting but also most challenging growth investments in the technology sector due to its unique technological architecture. The core thesis is based on the company's successful transformation from a content delivery network (CDN) to a leading provider of a globally integrated connectivity cloud that combines network security (SASE), performance and edge computing. Cloudflare is strategically positioned to capitalize on the consolidation of fragmented enterprise IT infrastructures and the emergence of the AI-driven Internet.
Although the company has a strong competitive advantage and has achieved operational profitability, the stock is extremely highly valued (P/E > 250). The multiplier potential (multi-bagger potential) is there, but is absolutely dependent on the successful conquest of the enterprise market and the significant expansion of operating margins in the coming years.
I. Business model and strategic positioning
Cloudflare's business model has changed fundamentally. While traditional strengths such as layer 7 DDoS protection, web application firewalls (WAF) and bot management continue to be important sources of revenue, the strategic focus is now on two expansive pillars: Zero Trust/SASE and Edge Computing.
Zero Trust & Network Security (Cloudflare One): Cloudflare addresses the growing complexity and increasing attack surface created by hybrid work models and digital transformation. Cloudflare One, the Secure Access Service Edge (SASE) platform, aims to replace legacy investments in networks and security infrastructures. This includes products such as Cloudflare Magic WAN for WAN modernization, Cloudflare Access for Zero Trust Network Access (ZTNA) implementation, and Cloudflare Gateway for cyber threat prevention. The goal is to simplify the corporate network and establish a "unified risk posture" to reduce complexity and tool fatigue in security teams. This consolidation strategy is a direct attack on the fragmented legacy markets and generates exponentially higher customer retention. Cloudflare has been recognized as a Visionary in the Gartner Magic Quadrant 2025 for its comprehensive transformation in the SASE space.
Developer Platform (Cloudflare Workers)
The Cloudflare Workers edge compute platform enables the development of applications that run across the 330 global locations of the Cloudflare network, ensuring ultra-low latency. New offerings such as Workers VPC and Workers VPC Private Link enable organizations to develop applications on Workers and securely connect them to their core business data in external cloud VPCs. Cloudflare is positioning itself as a decentralized alternative to traditional hyperscalers and a critical infrastructure for the demands of the future Internet, especially with regard to AI workloads that require processing proximity to the end user. The strict limitation and optimization of the worker platform (e.g. to 10 MB after compression for paid plans) is aimed at maximum efficiency in execution.
II Management and affiliation
Since its inception, the company has been led by co-founders Matthew Prince (CEO) and Michelle Zatlyn (President & COO). Michelle Zatlyn, who holds an MBA from Harvard, brings the necessary business and operational strength. The leadership is recognized for its aggressive innovation strategy, which has resulted in dozens of products and hundreds of features in a short period of time. CEO Matthew Prince emphasizes that this unstoppable pace of innovation is key to the company's customer expansion and success. This founder continuity combined with a visionary, product-focused strategy is seen as a strong asset.
III The moat
Cloudflare's competitive advantage is deeply rooted in its network architecture and economic growth model.
Cloudflare operates a global network with a presence in 330 cities in over 125 countries. This unprecedented density of Points of Presence (PoPs) is the primary competitive advantage that is difficult to replicate.
This physical infrastructure creates a massive barrier to entry, as building and maintaining such a decentralized network requires immense capital and time. While competitors like AWS or Google often rely on large, centralized regions, Cloudflare's dense edge network allows for extremely low latency, which is essential for modern SASE implementations (network security) and edge compute applications (workers). Cloudflare thus controls the entire stack - from physical connectivity to the application layer - which optimizes performance and generates a lock-in effect based on superior technical efficiency and simplicity, rather than pure contract lock-in.
The economic moat is evidenced by the high Dollar-Based Net Retention Rate (DBNR). In the first quarter of 2022, this key figure reached a record 127%. A value above 120% is considered excellent and implies that existing customers would increase their spending by more than a quarter annually, even if no new customers were acquired.
This expansion is driven by the growing adoption of the platform by large customers: the number of customers with annual spend of over $1 million grew by 72% year-on-year in the first quarter of 2022. The ability to progressively move customers from a free entry-level service to more complex, lucrative enterprise services (SASE, Workers) is at the core of the growth model. Management's emphasis on the fact that customers increasingly tend to consolidate multiple network services with a single provider reinforces this lock-in effect and ensures long-term scaling.
IV. Financial analysis and growth
Cloudflare continues to show robust growth, but has stabilized from pandemic-driven highs.
In the second quarter of 2025, Cloudflare generated total revenue of $512.3 million, an increase of 28% year-over-year. The company has thus exceeded the annualized revenue threshold of $2 billion.
A key indicator of future acceleration is pipeline growth: Current RPO (Remaining Performance Obligations) growth was 33% year-over-year in the second quarter of 2025. With RPO growth outpacing revenue growth, this indicates a healthy and growing pipeline of larger, longer-term contracts in the Enterprise segment.
At 76.3% (Q2 2025), the non-GAAP gross margin is at a very high level for an infrastructure company, although it has fallen slightly compared to the previous year (79.0%). This slight decline in gross margin is likely the result of targeted strategic investments in physical infrastructure to scale the Workers platform or to leverage aggressive pricing to win large enterprise deals in the SASE market.
Despite the slight decline in gross margin, Cloudflare maintained stable operating profitability. Non-GAAP operating margin was 14.1% in the second quarter of 2025. The ability to maintain a stable operating margin with growing revenue and strategic infrastructure investments demonstrates strong operating leverage. The cost of acquiring and servicing existing customers is becoming more favorable relative to revenue, which is fundamental to the multi-bagger potential. Non-GAAP operating income of $284.0 million to $286.0 million is forecast for the full year 2025.
V. Valuation and Investment Conclusion
Cloudflare is valued as a premium class company, reflecting the extremely high market expectations for future growth. The forecast for 2025 shows a P/E ratio (price/earnings ratio) of 254. Such a multiple signals that the market expects Cloudflare to maintain annual growth rates in the high 20s or low 30s over a period of at least five to seven years, accompanied by a massive increase in operating profitability.
The multiplier potential lies mainly in margin expansion. Given the stable gross margin of 76%, much of the future sales growth can be converted into higher operating margins, which could push the current 14% margin well above 20% in the medium term. The successful conquest of the SASE market, evidenced by the strong RPO growth of 33% , is the key catalyst to deliver the necessary sales acceleration to justify the high valuation.
Conclusion
Cloudflare has a superior and sustainable competitive advantage supported by its unique global network architecture and strong lock-in effects. The transformation to a comprehensive SASE and edge compute provider opens up huge growth markets.
Cloudflare offers multiplier potential as it has the potential to massively expand margins through economies of scale and gain market share from hyperscalers and legacy providers. However, the risk is proportional to the valuation. The share is only suitable for private investors who are prepared to take a high risk, tolerate extremely volatile price movements and have a long investment horizon (five to seven years). The thesis stands and falls with the management's ability to manage the company's The multiplier potential lies mainly in the margin expansion. Given the stable gross margin of 76%, much of the future sales growth can be converted into higher operating margins, which could push the current 14% margin well above 20% in the medium term. The successful conquest of the SASE market, evidenced by the strong RPO growth of 33% , is the key catalyst to deliver the necessary sales acceleration to justify the high valuation