Cloudflare Growth Reaccelerates, with Workers and Consumption-Based Revenue Opening Upside Potential

Overview

Cloudflare delivered broad-based business acceleration in the second quarter, with revenue growth rising from 34% in the first quarter to 36%, and strong performance across security, application networking, and the Workers developer platform. Management raised fiscal 2026 revenue and margin guidance, while Morgan Stanley believes that the increasing share of consumption-based Pool-of-Funds contracts, customer usage ramp-up, and conservative second-half seasonality assumptions mean the latest guidance may still be exceeded.

Core views

The core view is that Cloudflare is shifting from a contract-expansion-driven growth model to one driven jointly by contracts and usage. Continuous improvement in sales productivity, broad expansion across enterprise customer spending tiers, a rebound in DBNRR, and accelerated Workers commercialization together enhance the durability of revenue growth. Multi-year large contracts in Zero Trust, SASE, and application networking show that the security product portfolio remains strong, while AI agent security and edge AI workloads may create new sources of demand. With a multi-product platform, healthy demand environment, and improving margins, the company is positioned to sustain 30%+ growth for many years, though the current valuation already embeds high growth expectations.

Analysis framework

The report compares quarterly actual results with consensus expectations, focusing on revenue, remaining performance obligations, customer growth, net retention rate, sales efficiency, and margins; it then assesses forecast upside by combining the company’s latest guidance, historical seasonality, and consumption-based contract usage trends. Valuation uses a long-term free cash flow scenario analysis, deriving the price target from 2034 free cash flow, EV/FCF multiple, and an 11% discount rate, with bull, base, and bear case scenarios.

Methodology notes

• Financial forecastingMorgan Stanley ModelWare

  Standardized earnings forecasting framework

  Used to organize company actual data, Morgan Stanley forecasts, and Refinitiv consensus expectations, and to compare quarterly results, guidance, and model adjustments.

• Valuation methodsLong-term free cash flow discounting and EV/FCF multiple method

  Terminal value valuation based on forward free cash flow

  The base case uses approximately $5.5B of 2034 free cash flow, a 56x EV/FCF multiple, and an 11% discount rate to derive a $370 price target; the higher multiple reflects the company’s potential for faster growth and margin improvement.

• Scenario analysisBull, base, and bear case scenarios

  Sensitivity analysis of growth, margins, and valuation multiples

  The bull case price target is $490, the base case is $370, and the bear case is $212, corresponding to different assumptions for long-term revenue growth, free cash flow, and valuation multiples.

Asset mapping & comparison

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

• Cloudflare Inc（US.NET）

  The report directly covers the stock, maintains an Overweight rating, and raises the price target.

  Strengths

  Global edge network, multi-product platform, continued improvement in sales efficiency, rapid Workers growth, enterprise customer expansion, and strengthening demand for AI agent security.

  Weaknesses

  Valuation is significantly above peers, gross margin is still in the early stages of recovery, and consumption-based revenue increases quarterly recognition volatility.

  Comparison

  Compared with traditional security vendors and public cloud platforms, Cloudflare combines network performance, security, and developer platform capabilities; its higher growth and margin improvement prospects support a valuation premium.

  Risks

  Intensifying competition, slower-than-expected penetration into the large enterprise market, obstacles to converting free customers to paying customers, slower Workers commercialization, and long-term margin expansion below expectations.

Key data

• Second-quarter revenue$696.1MUp 35.9% year over year and 4.7% above the $664.8M consensus expectation.
• Midpoint of third-quarter revenue guidance$736.5MImplying approximately 31% year-over-year growth and 2.1% above consensus expectations.
• Midpoint of fiscal 2026 revenue guidance$2.867BRaised by $58M from the prior guidance midpoint, implying approximately 32% growth.
• Current remaining performance obligation growth34%Indicates contract coverage and future revenue visibility remain solid.
• Number of large customers4,698Up 27% year over year, with record net additions across all annual spending tiers.
• Dollar-based net retention rate120%Up 2 percentage points sequentially and 6 percentage points year over year.
• Net new paying customersapproximately 80,000Up 74% year over year.
• Workers developer baseapproaching 7.5 millionAdded approximately 2 million in the second quarter, exceeding the approximately 1.5 million added in all of 2025.
• Non-GAAP operating profit$96.1M6.5% above consensus expectations.
• Gross margin73.1%Up 30 basis points sequentially, the first sequential improvement in eight quarters.
• Price target$370Raised from $322, implying approximately 30.1% upside relative to the current price of $284.43.

Impact & implications

The results show that Cloudflare’s platform strategy is translating from product adoption into more visible revenue contribution. Cross-selling among Workers, R2, Zero Trust, and SASE is expected to increase enterprise customer spending and expand the scale of consumption-based contracts; AI-native enterprises and agentic workloads may further strengthen its position in edge infrastructure. If usage ramp-up drives second-half seasonality above guidance assumptions, revenue forecasts may continue to be revised upward. However, the recent share price increase has widened the valuation premium relative to peers, making future returns more dependent on continued delivery of high growth and margin expansion.

Risks

• The current valuation premium is high; if growth or margins fall short of expectations, valuation multiples could contract significantly.
• Competition from pure-play security vendors, public cloud service providers, and large integrated vendors may limit enterprise market expansion.
• Pool-of-Funds contracts shifting toward consumption-based revenue may increase volatility in quarterly revenue recognition and forecasting.
• Conversion of free traffic to paying customers may be weaker than expected, and the mix of paid and free traffic will continue to affect gross margin.
• Long-term margin expansion may prove more difficult than current model assumptions.
• If commercialization of Workers and AI-related products slows, long-term growth and target valuation will face downside risk.
• Morgan Stanley discloses that it holds at least 1% of Cloudflare Inc’s common equity and has or may seek multiple types of business relationships with the company; investors should be aware of potential conflicts of interest.

What to watch

• Delivery against third-quarter revenue guidance of $736.0M to $737.0M, and whether second-half seasonality exceeds company assumptions.
• Workers revenue contribution, developer count, Pool-of-Funds contract size, and actual customer usage ramp-up.
• Whether DBNRR can remain around 120% or continue to improve.
• Net addition trends for customers with annual spending above $100K and higher tiers.
• Whether sales productivity and new customer orders can sustain the strongest momentum in five years.
• Whether gross margin can stabilize around 73%, and whether the paid versus free traffic mix continues to improve.
• Whether AI agent security demand can translate into new Zero Trust and SASE contracts.
• Whether revenue growth, free cash flow, and operating margin can support a 56x forward EV/FCF valuation.