Cloudflare, the mid-cap technology firm synonymous with distributed network security and web performance, received an upgraded fair value estimate of $130 per share from Morningstar, reflecting growing investor confidence in its expanding edge computing and cybersecurity portfolios. Despite macroeconomic uncertainty, the company delivered a 27% year-over-year revenue growth in Q1 2025, driven by rising adoption of its Workers platform and deepening enterprise client relationships. With large clients now constituting 69% of its revenue, Cloudflare is increasingly seen as a foundational player in future-ready internet infrastructure. While shares are deemed fairly valued at the current price of $124.31, Cloudflare's long-term prospects remain robust.

Morningstar Maintains “Exemplary” Capital Allocation and Raises Fair Value to $130

Morningstar has reaffirmed its confidence in Cloudflare’s strategic capital allocation, maintaining an “Exemplary” rating and upgrading its fair value estimate from $104 to $130. This adjustment reflects stronger medium-term growth projections and continued traction of its Workers edge computing platform.

The valuation implies an enterprise/sales multiple of 20x for 2025, supported by a 28% compound annual revenue growth forecast over the next five years. At a price/fair value ratio of 0.96, shares are currently considered fairly valued.

Strong Q1 2025 Performance Underscores Enterprise Penetration

Cloudflare posted $479 million in Q1 revenue, a 27% YoY increase, with enterprise accounts growing in both share and depth. Clients spending more than $100,000 annually increased by 23%, underlining the firm’s successful upmarket expansion.

Operating leverage was evident, as adjusted sales and marketing expenses dropped to 38% of revenue despite elevated investments in AI and product development.

Workers Platform Emerging as Strategic Growth Engine

The firm’s serverless edge computing solution, Workers, continues gaining traction. Morningstar sees this platform as a linchpin for Cloudflare’s future revenue streams—particularly with emerging demand from low-latency AI workloads.

Cloudflare’s edge infrastructure, spanning over 250 cities globally, allows it to process data at or near the source, reducing response times and enhancing performance—a critical differentiator in sectors like gaming, IoT, and real-time analytics.

Robust Economic Moat Supported by Switching Costs and Network Effects

Cloudflare is assigned a “Narrow Moat” rating, attributed to:

High customer retention (>90% gross retention and >120% net retention).

A sticky, upsell-friendly product suite that expands with client needs.

A massive user base, with over 10% of internet traffic and 25% of websites routed through its platform.

The firm’s strategy of offering free basic security tools to small websites isn’t altruistic—it’s a long-term data capture play, enhancing its platform and increasing network value.

Key Financial Metrics and Forecasts

Below is a snapshot of Cloudflare’s projected financial trajectory:

By 2029, Cloudflare is projected to deliver over $5.4 billion in revenue, with adjusted EPS surpassing $4, and free cash flow nearing $900 million.

Edge Computing as a Game-Changer in Hybrid Cloud Strategies

Cloudflare is uniquely positioned to capitalize on the shift to multi-cloud and hybrid edge architectures, a trend driven by enterprises avoiding vendor lock-ins and seeking cost-efficiency amid rising egress fees from large cloud providers.

The company’s leadership in the Bandwidth Alliance—a consortium advocating reduced cloud data transfer costs—is further reducing friction for developers adopting Cloudflare’s edge services.

Risks Remain High Despite Long-Term Promise

While Cloudflare’s trajectory is upward, Morningstar assigns a “Very High” uncertainty rating due to:

Competition from Amazon, Microsoft, and Google in edge computing.

Continued GAAP losses and high operating expenditure.

Key-man risk, with the firm heavily reliant on CEO and founder Matthew Prince.

Peer Comparison Snapshot

Conclusion: Positioned for Strategic Growth with Cautionary Valuation

Cloudflare continues to impress with its dual-engine growth model—security and edge computing—positioning itself as a formidable force in the infrastructure software arena. Its ability to scale enterprise clientele, innovate through platforms like Workers, and tap into secular megatrends makes it a name worth tracking.

However, with shares trading near fair value and the stock showing significant volatility in past quarters, investors may want to wait for a more attractive entry point before initiating or adding to positions.

Morningstar Rating: 3 stars
Fair Value Estimate: $130
Last Close: $124.31
Investment Horizon: 3–5 years

Disclaimer: Investors are advised to conduct their own due diligence and consult financial advisors before making investment decisions.