Cloudflare's slowing growth disappoints investors betting on AI boost
FILE PHOTO: A logo of CLOUDFLARE sits outside the company's house on the opening day of the 55th annual meeting of the World Economic Forum (WEF) in Davos, Switzerland, January 20, 2025. REUTERS/Yves Herman/File Photo
May 8 : Cloudflare shares tumbled more than 15 per cent in premarket trading on Friday, after its quarterly revenue forecast disappointed investors who had bet the stock would be a major beneficiary in the race to adopt artificial intelligence.
The networking and cybersecurity services provider will also lay off about 20 per cent of staff due to greater use of AI tools, a move that Jefferies said could hurt near-term growth.
Following a 43 per cent rally since its last quarterly results in February, analysts said expectations were high for the company, only for its forecast to flag slower growth as rising AI infrastructure costs squeeze margins.
Cloudflare said it expects revenue to increase up to about 30 per cent in the second quarter, slower than the 33.5 per cent growth recorded in the first quarter. Its adjusted gross margins shrank to a record low of 72.8 per cent in the first quarter, from 77.1 per cent a year ago.
"To protect its profitability, the firm is trading higher infrastructure costs and depreciation for salaries," Morningstar senior equity analyst Malik Ahmed Khan said.
The AI-driven layoffs align Cloudflare with companies such as Jack Dorsey's Block, which have said the technology could change how work is done by automating tasks such as coding.
But experts and tech executives, including OpenAI CEO Sam Altman, have warned that companies are using AI as the reason for job cuts they would have done anyway.
Despite the share drop, analysts were broadly positive on Cloudflare after the results that included better-than-expected quarterly sales and an increased annual revenue forecast.
The company's services have proven crucial for users of AI tools such as the autonomous agent known as Openclaw.
About four brokerages raised their price targets on Cloudflare stock, taking the median to $243.
Cloudflare's 12-month forward price-to-earnings ratio is 198.93, compared with CrowdStrike's 95.57 and Palo Alto's 50.13.
