Cloudflare Rises 9% in 3 Months: Should You Hold or Fold NET Stock?

Cloudflare (NET) has outperformed its industry, gaining 8.8% in the last three months, driven by strong Q1 2025 results with revenue up 27% year-over-year to $479.1 million and a 23% increase in customers paying over $100,000 annually; however, revenue growth is decelerating, and the company faces increasing competition, leading to a "hold" rating.

Analysis

Cloudflare, Inc. (NET) has demonstrated notable stock performance, gaining 8.8% over the past three months and significantly outperforming the Zacks Internet – Software industry's 2% decline, buoyed by strong Q1 2025 results. The company reported a 27% year-over-year revenue increase to $479.1 million, driven by robust demand from large customers; those paying over $100,000 annually increased by 23% to 3,527, with this segment's revenue contribution growing 32% to represent 69% of total revenues. Furthermore, Cloudflare saw record growth in customer cohorts spending over $1 million and $5 million annually, up 48% and 54% respectively. Profitability also improved, with operating income rising 32% to $56 million and operating margin expanding 50 basis points to 11.7%. Growth is further supported by expanding AI offerings, evidenced by a nearly 4,000% YoY increase in Workers AI inference requests, and a strengthening Zero Trust security portfolio, highlighted by significant contract wins including a $6.4 million deal with a Global 2000 company and a $6.2 million U.S. government contract. However, a key concern is the decelerating trend in revenue growth; the 27% Q1 growth is down from 29% in 2024 and 33% in 2023, with full-year 2025 guidance of $2.09-$2.094 billion implying a further slowdown to approximately 25% growth. This deceleration, coupled with intensified competition from established players like Akamai, Fastly, and Amazon Web Services, presents near-term risks. The company projects Q2 2025 revenues between $500-$501 million (a 24.88% YoY increase at consensus) and non-GAAP EPS of 18 cents (a 10% YoY decline at consensus), while full-year 2025 non-GAAP EPS is guided at 79-80 cents (a 5.33% YoY increase at consensus).

Key Decisions for Investors

• Given Cloudflare's strong enterprise adoption and AI-driven initiatives, investors might consider maintaining current positions, aligning with the article's 'hold' stance.
• Investors should closely monitor subsequent quarterly revenue growth rates for signs of further deceleration or stabilization, as this is a primary risk factor highlighted.
• Pay attention to competitive dynamics and Cloudflare's ability to sustain market share and pricing power against established and emerging competitors in the web infrastructure and security space, particularly in its high-growth AI and Zero Trust segments.