During the October 1 episode of Mad Money, Jim Cramer discussed Cloudflare, Inc. (NYSE:NET) as a beneficiary of growing AI traffic, while expressing reservations about buying at its current valuation. Cramer called Cloudflare one of his favorites in a September episode and also mentioned another “terrific” company with it.
AI Agents Are Changing Internet Traffic
Cramer opened by explaining why he believes Cloudflare, Inc.’s infrastructure has become increasingly important:
Let’s start with Cloudflare, NET, which is by far the largest of the content delivery networks with a stock that’s now up over 2,200% since it came public in 2019. We’ve had CEO Matthew Prince on the show many, many times, and he’s been very prescient about what the arrival of AI means for the rest of the internet. Last time we spoke to him was in June. He said that traffic from AI agents had already surpassed traffic from humans, and what a great call that was. That’s the point of agents. If you’re comparison shopping for something, you might only check a few websites, but an AI agent will visit thousands of sites in order to find you the best deal.
Cloudflare is expanding the controls websites use to manage that activity. In September, it expanded its controls, allowing website owners to independently manage search, AI training and AI-agent access, allowing website owners to restrict training without automatically losing visibility in traditional search. Its Bot Preference Sync feature applies crawling preferences across supported operators. We also recently discussed if Cloudflare’s cash flow is real.
Revenue Growth Accelerates
Discussing the commercial opportunity for Cloudflare, Inc., Cramer continued:
So, there’s a heck of a lot more web traffic now and somebody like Cloudflare needs to help us handle it. That’s one reason why the stock keeps putting up these fantastic numbers with steadily accelerating revenue growth or ARG over the past year or so.
Second-quarter revenue increased 36% year-over-year to approximately $696.1 million. Current remaining performance obligations, representing contracted revenue expected to be recognized over the next 12 months, grew 35%. Free cash flow increased to approximately $56.4 million from $33.3 million a year earlier. You can also read more on how the company defied SaaSpocalypse.
Margin Pressure and a Demanding Price
The growth has come along with weaker margins. Cloudflare’s GAAP gross margin declined to 71.8% from 74.9%, while its adjusted operating margin slipped to 13.8% from 14.1%. The company recorded a GAAP operating loss of approximately $205.7 million, including approximately $150.7 million in restructuring and other charges. Cramer distinguished his enthusiasm for the business from his willingness to buy the shares, as he said:
So, have you missed it or can… [it] keep running? Tricky question. I love Cloudflare, but it’s selling for 279 times this year’s earnings. Then again, the stock’s always been expensive, and if you let that scare you away, you’ve missed some huge gains. Still, if you want to buy Cloudflare here, I recommend waiting for a meaningful marketwide pullback. Between Iran and the Federal Reserve, I bet someone’s going to give an opportunity.
Cloudflare, Inc. trades at approximately 43x forward sales, compared with 5.5x for Fastly and 3.3x for Akamai. Different growth rates and business mixes affect the comparison, but Cloudflare still carries a substantial premium to those competitors.
A Small Increase in Fund Ownership
Insider Monkey’s database of more than 1,000 hedge funds showed 87 funds holding Cloudflare in the second quarter, up from 84 in the preceding quarter. With 2.076 million shares, AQR Capital Management was the hedge fund with the most significant position in it in the second quarter. Additionally, short interest stood at 2.71% of the public float, a relatively modest level of short positioning.
Cloudflare, Inc.’s expanding AI tools and faster revenue growth possibly explain Cramer’s continued interest. His recommendation, however, is to wait. The company is growing quickly, but its margins and valuation leave investors with more to consider than the increase in internet traffic alone.
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