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This is turning out to be a solid year for technology stocks following last year’s forgettable performance — as evidenced by the 21.7% gains clocked by the Nasdaq-100 Technology Sector index so far in 2023. And the good part is that the rally could continue thanks to multiple positive data points.
For instance, inflation in the U.S. seems to be cooling. The Consumer Price Index was up 6% year over year in February, which was the lowest annual growth since October 2021. At the same time, a healthy jobs market and the possibility of a pause in the Federal Reserve’s rate hikes could turn out to be additional catalysts for the stock market in 2023. It is also worth noting that stocks tend to bounce back strongly after a down year, so it won’t be surprising to see the bull run continue.
That’s why investors would do well to consider buying shares of Cloudflare (NET 1.48%) before they fly higher. Cloudflare provides an integrated platform for securing multiple types of cloud platforms, software-as-a-service applications, and Internet of Things devices, while also offering application and website security products. In simpler words, Cloudflare says it is “a large network of servers that can improve the security, performance, and reliability of anything connected to the Internet.”
Cloudflare’s key role in helping the world remain connected to the internet has led to terrific growth in its business, which explains why analysts expect an impressive upside from the company.
Cloudflare stock is expected to take off big time
The 24 analysts covering Cloudflare have a median price target of $66 on the stock, which points toward an upside of 17% from current levels. However, the analysts’ high price target of $109 would translate into much stronger gains of 93%.
It won’t be surprising to see Cloudflare stock live up to Wall Street’s expectations and soar strongly over the next year as a new catalyst — artificial intelligence — could significantly supercharge its growth. The company finished 2022 with a 49% spike in revenue to $975 million. It also swung to an adjusted net income of $0.13 per share as compared to a loss of $0.05 per share in the prior year, a figure that’s expected to move higher in 2023 and beyond.
NET EPS Estimates for Current Fiscal Year data by YCharts
That’s not surprising as Cloudflare expects a 37% jump in revenue this year to $1.34 billion. But there is a strong likelihood of Cloudflare crushing its growth target thanks to the emergence of a new catalyst.
On its February earnings conference call, Cloudflare CEO Matthew Prince remarked that a “leading generative AI company signed a one-year $1 million deal.” He went on to explain that the company had been a free user of Cloudflare’s services since 2017, but once its “browser-based application debuted in late November, demand for the company’s AI-generated content absolutely exploded with unprecedented rates of adoption.”
Though Cloudflare management didn’t name the company, it is most likely referring to OpenAI, whose ChatGPT chatbot was launched on Nov. 30, 2022. ChatGPT has seen stupendous adoption rates and reportedly hit 100 million monthly active users in January this year, in just two months of its launch. Backed by a multibillion-dollar investment from Microsoft, OpenAI is now looking to expand ChatGPT’s use cases and has started monetizing the platform as well.
This should be good news for Cloudflare as OpenAI has tapped the former for handling internet traffic smoothly on its website and to keep fraudulent users at bay. Also, Cloudflare believes that its object storage platform “has become the natural neutral place for these AI companies to store their training data in order to make sure it can be inexpensively and efficiently access[ed] from anywhere.”
This indicates Cloudflare could witness a jump in the demand for its offerings as generative AI applications are likely to take off. Grand View Research is forecasting a 34% annual increase in revenue from the generative AI market through the end of the decade. As a result, the amount of AI-related data flowing through the cloud is expected to increase substantially as well.
Mordor Intelligence, for instance, estimates that the cloud AI market could clock 22% annual growth over the next five years. The research firm counts the jump in data volumes and the growing usage of virtual assistants such as ChatGPT as the reasons behind this market’s growth. Given that Cloudflare is used by an estimated 80% of websites using a content delivery network and has a 96% share of the network security market, it is in a solid position to make the most of the growing deployment of generative AI applications.
The stock is expensive, but growth investors may find it attractive
At 19 times sales, Cloudflare stock is quite expensive when compared to the S&P 500‘s sales multiple of 2.3. But the good part is that investors looking for a growth stock are getting Cloudflare at a relatively attractive valuation now since it was much more expensive a year ago.
NET PS Ratio data by YCharts
Also, Cloudflare could justify its rich valuation thanks to the rapid growth that it is expected to deliver, as well as new catalysts such as generative AI that could accelerate its growth in the future. As such, Cloudflare stock seems capable of jumping higher following the 25% gains that it has clocked so far in 2023, which is why growth-oriented investors may want to buy it before it’s too late.
Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Cloudflare and Microsoft. The Motley Fool has a disclosure policy.
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