Cloudflare Stock Is Soaring. Is It a Buy for 2025?

The growth of digital content and cloud computing drove more demand for content delivery networks (CDNs) like Cloudflare (NYSE: NET). Cloudflare has a large network of data centers that helps reduce latency and speed up performance for things like video streaming and cloud applications.

The stock doubled in value since bottoming out in 2022. Strong financial results over the last two quarters helped send the stock up 33% in the last three months. The share price is sitting at $107 at this writing after recently hitting a 52-week high of $119.

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The stock is now trading at a more expensive valuation of 23 times trailing sales. To justify the valuation, Cloudflare may need to show even better revenue growth in 2025. While there are catalysts that could make that happen, there are also headwinds that could limit the stock's performance.

Consistent revenue growth

Despite increasing competition from Amazon CloudFront and other CDN providers, Cloudflare continues to hold a solid lead. Nearly 20% of all websites use Cloudflare to secure their internet connections, according to W3Tech, which is slightly up from 18% a few years ago.

While some software-as-a-service (SaaS) companies reported slowing growth over the last year due to macroeconomic headwinds, Cloudflare shows stable revenue growth. In Q3, revenue grew 28% year over year, compared to 30% in Q1 and Q2. Cloudflare continues to sign deals with more Fortune 500 companies, which now account for 35% of the company's paying customer base.

Moreover, Cloudflare is starting to see its growing scale drive improving profitability. The most recent quarter showed its net loss narrowing to $15 million, an improvement from $23 million in the year-ago quarter. Cloudflare also converted 11% of its revenue into free cash flow in Q3.

Investors are pricing in more growth

Investors rewarded the company's strong financial results in 2024 by rating the shares at a higher valuation. The stock now trades at a price-to-sales multiple of 23, up from 17 three months ago. Investors seem to be pricing in accelerating sales growth over the next few years and possibly higher profit margins. There are a few catalysts that could make that happen.

NET data by YCharts

Cloudflare could be positioned to benefit from the growth of artificial intelligence (AI) applications. The company has a vast global network of data centers spread over 330 cities. This helps speed up processing for users, which could become an important growth driver for Cloudflare as AI-powered chatbots come to market that require real-time processing close to the end user.

The company could also see accelerating growth as it improves sales productivity. With larger enterprises showing interest in its services, management is boosting its sales efforts to win larger deals, which could lead to higher contract values in 2025.

Is Cloudflare stock a buy?

Investors should also be aware of headwinds that could continue to weigh on Cloudflare's revenue growth in 2025.

While there are efforts to improve sales productivity, management also noted lengthening sales cycles during Q3. Companies are still hesitant to spend money, as some large deals are taking longer to complete. Most analysts expect the company to report revenue growth of 26% in 2025, which may not be enough to support a higher P/S multiple.

Everything has to go right to earn great returns from the current share price, and that's the downside of paying a high valuation. For now, it's best to wait for a lower valuation before starting a new position.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Cloudflare. The Motley Fool has a disclosure policy.