Cloudflare Inc’s shares rallied over 70% in May, sending them to around $70.
Analysts at UBS believe the stock may have gotten ahead of itself, as they initiated coverage on the San Francisco-based web content and security platform with a ‘Sell’ rating and a $55 12-month price target.
“We think investors are pricing in too much near-term AI benefit (potentially CY24 revenues 25%+ higher than our estimates),” the analysts wrote in a note this week.
“While we expect Cloudflare's distributed edge can play a role in the GenAI ecosystem longer-term, we think near-term expectations are being conflated with the opportunities of companies more directly tied to centralized compute.”
While UBS is optimistic about opportunities in app security, edge computing and network security longer term, the analysts said they still see a challenging near-term setup due to potential go-to-market disruption, cloud optimizations, and a tough macroeconomic environment.
They maintain Cloudflare’s shares are “priced for perfection,” trading at 14.5 times estimated earnings for the 2024 calendar year and at a 50% premium to peers — and near the high end of all software companies.
“The AI halo is powerful, but we don’t expect initial revenue opportunities in app sec and object storage can fully offset tangible concerns around broader business momentum,” the analysts said.
That said, if more opportunities for edge computing in AI materialize, this could support Cloudflare’s shares.
“In addition, while enterprise adoption of the network security platform is still early and edge compute growth is negatively impacted by cloud optimizations, further traction in these high growth areas could also bolster shares,” the analysts added.
“We (along with customers and partners we spoke with) are broadly supportive of Cloudflare's engineering prowess and ability to enter new markets through disruptive innovation.”
Contact the author at stephen.gunnion@proactiveinvestors.com