Cloudflare's AI Deals Spark Upgrade, But Valuation and Leverage Loom Large

What happened

Seeking Alpha upgraded Cloudflare to a Buy rating after recent customer wins, including a $15 million media platform and a $12.4 million European pharmaceutical contract, demonstrating its shift from a CDN to an AI inference platform that competes with hyperscalers by offering lower costs and no egress fees. DeepValue's master report, based on SEC filings, acknowledges Cloudflare's strong operational performance with 31% YoY revenue growth, mid-70s gross margins, and scaling free cash flow in Q3 2025. However, the stock has surged 86% over 12 months to a $70 billion market cap, trading at extreme multiples like EV/EBITDA over 1,100x and a GAAP P/E of -684x, with persistent GAAP losses and over $3.2 billion in convertible debt creating high leverage and dilution risks. The new contracts validate Cloudflare's AI narrative but do not mitigate the stretched valuation, limited margin of safety, or operational vulnerabilities such as potential outages or competitive setbacks highlighted in the filings. For investors, this creates a tension between promising growth traction and financial prudence, as the premium price embeds optimistic expectations that may not withstand any slowdown.

Implication

The AI-driven customer wins could accelerate Cloudflare's revenue growth and net retention, strengthening its competitive moat against hyperscalers and supporting the strategic shift to a connectivity cloud platform. However, achieving durable GAAP profitability remains elusive due to high stock-based compensation and operating expenses, while the substantial convertible debt over $3.2 billion elevates financial risk with negative interest coverage and net debt/EBITDA of 21x. Valuation metrics show a severe premium, with the stock trading ~14-15x above a conservative DCF estimate, offering little buffer for multiple compression if growth decelerates or reliability issues recur. For existing shareholders, this news may justify holding for long-term growth, but new investors should avoid adding at current levels and consider trimming positions to manage risk. Ultimately, the implication is that while Cloudflare's operational progress is commendable, the investment case hinges on future execution to justify the price, making it a high-risk, high-reward proposition better suited for growth-focused portfolios than value-oriented ones.

Thesis delta

The Seeking Alpha upgrade reinforces Cloudflare's growth narrative with specific AI customer wins, which could support higher revenue and validate its platform transition, potentially delaying any sell triggers related to growth deceleration. However, this does not alter the core valuation concerns from DeepValue's POTENTIAL SELL stance, as the stock remains overvalued with high leverage and GAAP losses, meaning the thesis shift is minimal—investors should still prioritize risk management over bullish sentiment.