Cloudflare: After a post-close drop, Goldman Sachs maintains Buy and raises its target

Overview

This report is a company research update on Cloudflare (NET.US) by Goldman Sachs. It notes that Cloudflare’s 1Q26 revenue and EPS were both better than expected, but the stock declined after the close due to concerns around gross margin, near-term growth pace, and the workforce reduction. Goldman Sachs maintains a Buy rating and raises the target price to $266, viewing the pullback as a position-building opportunity.

Core views

Goldman Sachs’ core view is that Cloudflare’s business model advantage comes from multiple products at different maturity stages jointly supporting stable growth. Act I is CDN benefiting from more proxy-like traffic, Act II is enterprises moving from hardware firewalls to SASE/SSE, and Act III is AI inference demand. The firm also believes that the 20% layoff will not affect quota-carrying sales reps and may instead improve speed of innovation and efficiency under an AI-enabled operating model.

Analysis framework

The report combines 1Q26 actual results versus Goldman Sachs and market expectations, 2026E to 2028E financial forecasts, peer gross profit per employee benchmarks, valuation multiples, and target-price history to assess changes in Cloudflare’s growth, margins, free cash flow, and valuation.

Methodology notes

• Valuation methodsRevenue multiple valuation

  26x Q5-Q8 revenue

  Goldman Sachs uses 26x Q5-Q8 revenue as the valuation basis for the target price and raises Cloudflare’s 12-month target to $266.

• Factor analysisGS Factor Profile

  Growth, financial returns, valuation multiples, and composite factor

  Goldman Sachs uses standardized rankings of the covered stock versus the market and sector peers to compare growth, financial returns, valuation multiples, and the composite factor.

• M&A frameworkM&A Rank

  M&A Rank 3

  M&A Rank 3 indicates a lower probability of being a takeover target, at 0%-15%, and is typically not included in the target-price estimate.

Asset mapping & comparison

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

• NET.US

  Research target

  Strengths

  Multiple product cycles; CDN, SASE/SSE, and AI inference could all provide growth catalysts; quota-carrying sales reps are not affected by the layoffs; execution speed is viewed as a competitive key.

  Weaknesses

  1Q26 gross margin was below expectations, and 2Q guidance implies implied growth may remain in the low-30% range; valuation multiples are elevated.

  Comparison

  The chart shows NET pro forma gross profit per employee at about $390k, above NET actual at about $312k, with peer benchmarking after the layoff shifting from below the peer median to above the peer median.

  Risks

  Timing of productivity uplift realization, potential sales-org disruption, weaker SSE traction, and AI inference demand potentially being met by hyperscalers or other compute solutions.

Key data

• 1Q26 revenue$640mn3.1% above Goldman Sachs expectations and 3.0% above market expectations.
• 1Q26 revenue YoY growth34%Above the 30% expected by both Goldman Sachs and the market.
• 1Q26 gross margin73%Below the 75% expected by Goldman Sachs and the market.
• 1Q26 non-GAAP diluted EPS$0.259.6% above Goldman Sachs expectations and 8.5% above market expectations.
• Target price$266Prior target was $250, based on 26x Q5-Q8 revenue.
• 2026E/2027E/2028E free cash flow$401mn / $583mn / $831mnPrevious values were $402mn / $582mn / $775mn.
• Market capitalization$96.8bnDisclosed in the report.
• Enterprise value$95.6bnDisclosed in the report.

Impact & implications

In the short term, the post-close drop reflects investor concerns over gross margin, the sustainability of growth reacceleration, and the impact of the layoffs. Over the longer term, Goldman Sachs believes Cloudflare’s infrastructure advantage in networking, security, and AI inference may still support multi-year growth and make this pullback an opportunity to increase exposure.

Risks

• The timing for realizing new productivity and efficiency gains may be later than expected.
• Sales organization disruption may occur as the company expands into the enterprise market.
• SSE momentum may be insufficient.
• AI inference demand may be met by hyperscalers or other compute solutions.
• Below-expectation gross margin could weigh on near-term investor sentiment.

What to watch

• Whether revenue growth in 2Q and subsequent quarters re-accelerates.
• Whether gross margin, operating margin, and gross profit per employee improve after the 20% layoffs.
• Whether quota-carrying sales team expansion proceeds smoothly.
• Progress on SASE/SSE customer migration and enterprise penetration.
• Whether AI inference and AI-native enterprise traffic scales on the Cloudflare platform.