Cloudflare's Enterprise Metrics Strengthen, but Valuation and Risks Loom Large

What happened

Cloudflare's recent data shows accelerating enterprise traction, with enterprise customers up 23% year-over-year to 4,009, now driving 73% of total revenue compared to 67% last year. Dollar-based net retention improved sequentially to 119%, fueled by customers expanding usage across more than 55 products through pool-of-funds contracts. Remaining performance obligations surged 43% year-over-year to $2.143 billion, materially outpacing reported revenue growth of 30.7% and indicating robust future revenue visibility. However, the DeepValue report cautions that Cloudflare's stock has risen ~82% in 12 months, trades at extreme multiples, and sits about 2,400% above a conservative DCF estimate, reflecting a demanding valuation. Despite these operational gains, persistent GAAP losses, heavy stock-based compensation, and $3.3 billion in convertible debt overhangs mean the business quality is overshadowed by limited margin of safety for investors.

Implication

The growth in enterprise customers and net retention underscores Cloudflare's deepening market penetration and product stickiness, which could support sustained high revenue growth. Rising remaining performance obligations provide forward-looking confidence in revenue streams, potentially de-risking near-term forecasts. Yet, the stock's premium valuation implies perfection is already priced in, leaving little room for execution missteps or macro headwinds. Critical watch items include whether this operational strength can translate into GAAP profitability and manageable debt refinancing, as any faltering here could lead to significant downside. Ultimately, while the news is operationally positive, it does not justify aggressive investment at current levels, aligning with a monitoring stance rather than new capital deployment.

Thesis delta

The improved enterprise metrics, such as higher net retention and RPO growth, suggest Cloudflare is executing well on customer expansion, potentially bolstering the growth narrative. However, this does not shift the core investment thesis, as the stock remains egregiously overvalued with persistent profitability and balance sheet risks unchanged. Therefore, the overall stance remains WAIT, with no material upgrade warranted until valuation aligns more closely with fundamentals or risks are mitigated.