Second-quarter growth accelerated across the board; Cloudflare price target raised to $370

Overview

Cloudflare's second-quarter operating performance was broadly stronger than expected, with revenue growth accelerating from 34% in the first quarter to 36%. Growth was jointly driven by improved sales execution, enterprise customer expansion, demand for Zero Trust and SASE, growth in the Workers developer platform, and a business model shift toward usage-driven monetization. Morgan Stanley raised its revenue, profit, and EPS forecasts, reiterated its Overweight rating, and raised the price target from $322 to $370.

Core views

The report believes Cloudflare has entered a higher growth gear. Continued improvement in sales efficiency, accelerating growth in new customer bookings, and pipeline expansion indicate strong execution in the go-to-market system; security, application networking, and the developer platform all show broad-based strength. Workers is moving from early adoption to meaningful revenue contribution and is driving pool-of-funds contracts and enterprise customer expansion. The seasonal assumptions used in FY26 and second-half guidance are below the average level of the past two years, so revenue forecasts may still be revised upward. Sustained current remaining performance obligation growth of approximately 34% also supports the view that the company can maintain growth of over 30% for years to come.

Analysis framework

The report evaluates fundamentals by comparing quarterly results with consensus expectations, implied growth in revenue guidance, customer and order metrics, product mix, sales efficiency, and margin changes. It also forecasts free cash flow through CY2034 and derives the price target using a forward EV/FCF multiple and an 11% discount rate, while setting bull, base, and bear scenarios to assess risk-reward.

Methodology notes

• Financial ForecastingMorgan Stanley ModelWare

  Standardized earnings forecasting framework

  Used to form forecasts for revenue, margins, EPS, and free cash flow, and to compare them with company guidance and consensus expectations.

• Valuation methodsForward EV/FCF Multiple Discount Method

  Long-term free cash flow multiple valuation

  The base case uses CY2034 free cash flow per share of $12.90 and a 56x EV/FCF multiple, discounted to the present at an 11% discount rate, resulting in a $370 price target.

• Scenario AnalysisBull-Base-Bear Scenarios

  Multi-scenario risk-reward assessment

  Scenario values of $490, $370, and $212 are derived through different assumptions for revenue growth, long-term operating margin, free cash flow, and valuation multiples.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Cloudflare Inc (NET.N)

  Core research subject; maintain Overweight rating

  Strengths

  Revenue growth accelerated, sales efficiency continued to improve, enterprise customer expansion was strong, and Zero Trust, SASE, and Workers form multi-product growth engines.

  Weaknesses

  The valuation premium is high, gross margin remains significantly below historical levels, and the shift toward a usage-driven business model may increase quarterly revenue volatility.

  Comparison

  Compared with other software and security infrastructure companies, Cloudflare earns a higher valuation multiple thanks to its global edge network, multi-product platform, and higher growth.

  Risks

  Intensifying competition, weaker-than-expected penetration into large enterprises, difficulty converting free customers to paying customers, insufficient long-term margin expansion, and revenue recognition volatility from pool-of-funds contracts.

Key data

• Second-quarter revenue$696MUp 36% year over year, 4.7% above consensus expectations of $665M.
• Midpoint of third-quarter revenue guidance$736.5MCorresponds to approximately 31% year-over-year growth, 2.1% above consensus expectations of $722M.
• Midpoint of FY26 revenue guidance$2.867BRaised by $58M from the prior guidance midpoint, corresponding to approximately 32% growth.
• Current remaining performance obligation growth34%Indicates that future revenue visibility and order growth remain solid.
• Number of large customers4,698Up 27% year over year, with record net additions across all annual spend tiers.
• Dollar-based net retention rate120%Up 2 percentage points sequentially and 6 percentage points year over year.
• New paying customers in the second quarterApproximately 80,000Up 74% year over year.
• New developers in the second quarterApproximately 2,000,000Exceeded the approximately 1.5 million added in all of 2025, bringing the total number of platform developers to nearly 7.5 million.
• Second-quarter gross margin73.1%Up 30 basis points sequentially, the first sequential improvement in eight quarters.
• Base-case price target$370Implies approximately 30.1% upside versus the reference closing price of $284.43.

Impact & implications

The earnings beat and the full-year guidance raise reinforce Cloudflare's investment case as a high-growth, multi-product infrastructure platform. Security demand, AI agent protection, and Workers usage growth are expected to expand enterprise penetration and improve long-term revenue and free cash flow. However, the recent share price increase has widened its valuation premium relative to peers, and future returns will depend more on continued growth above expectations, enterprise customer expansion, and margin delivery.

Risks

• Competition from pure-play security vendors, public cloud service providers, and large integrated technology suppliers may limit enterprise market expansion.
• High-end customer expansion or conversion of free users to paying users may fall short of expectations.
• A rising share of pool-of-funds contracts and usage-based billing may increase quarterly revenue recognition volatility.
• Infrastructure investment, traffic mix, or price competition may cause gross margin and long-term operating margin improvement to fall short of expectations.
• The current valuation carries a significant premium relative to peers, and valuation multiples may contract if growth or free cash flow falls short of expectations.
• The commercialization pace of artificial intelligence and edge computing products may be slower than assumed in long-term valuation.

What to watch

• Whether third-quarter revenue can exceed the guidance midpoint of $736.5M.
• Whether actual seasonality in the second half is better than the conservative assumptions used in company guidance.
• The sustainability of growth in current remaining performance obligations, sales pipeline, and new customer bookings.
• Dollar-based net retention rate and net additions of customers with annual spend above $100K, $500K, $1M, and $5M.
• Usage growth and enterprise contract contributions from Workers, R2, Zero Trust, and SASE.
• Whether gross margin can stabilize at around 73% and whether FY26 operating margin improvement can be delivered.
• The impact of a rising share of pool-of-funds contracts on revenue predictability and quarterly volatility.