Zacks Compares Cloudflare and Fortinet, Citing Gross-Margin Pressure for NET

What happened

On October 14, 2026, Zacks Investment Research published a comparative analysis of Cloudflare (NET) and Fortinet (FTNT), concluding that Fortinet currently outshines Cloudflare due to stronger SASE growth, rising service revenues, and a lower valuation. The article highlights mounting gross-margin pressure at Cloudflare, consistent with the company's Q1 2026 gross margin decline to 71% from 76%, driven by higher infrastructure and third-party service costs. While the article does not provide new financial details, it underscores the competitive threat from Fortinet in security and networking, and reinforces concerns that Cloudflare's AI-driven growth may be eroding profitability. The master report had already flagged gross margin as a key risk, with a thesis breaker if margin fell below 71% again. Given the article's timing after Q2 earnings, it suggests Cloudflare's margin pressure persisted into Q2, though the master report does not yet include those results.

Implication

The article reinforces the master report's concern that Cloudflare's gross margin is under pressure, likely due to continued infrastructure costs and competitive dynamics. If Q2 results confirmed further margin deterioration, the stock's premium valuation becomes harder to justify. The comparison with Fortinet highlights that investors seeking cybersecurity exposure may find better value elsewhere, but Cloudflare's platform advantage and AI potential are not negated. The master report's attractive entry remains at $230, and the stock at $273.04 is still above that level, so no immediate action is recommended. Investors should monitor Cloudflare's Q2 earnings details, especially gross margin trajectory and RPO growth, before making changes.

Thesis delta

The article does not alter the fundamental WAIT rating, but it amplifies the bear-case probability by emphasizing gross-margin pressure and competitive threats. The master report's scenario probabilities may shift slightly: the bear case (25%) could be argued higher, but without concrete Q2 data, we keep probabilities unchanged. The key metric to watch remains gross margin stabilization; if margin continues to decline, the thesis would weaken further.