Shares of Cloudflare (NET 16.95%) were up by 16.3% as of 1:20 p.m. ET on Thursday following positive analyst comments from MoffettNathson regarding the company’s exposure to opportunities in the rapid adoption of artificial intelligence.
Cloudflare’s expansive server network already improves the performance and security of many popular websites, but MoffettNathson analyst Sterling Auty noted that the company has a huge opportunity in AI. It already handles the security for popular applications such as OpenAI’s ChatGPT and Apple‘s iCloud Private Relay service.
The stock fell hard last year as investors worried about macroeconomic headwinds and the possibility that companies would scale back their spending on cloud services. In addition, according to Auty, some investors might be nervous about the collapse in cryptocurrency prices and how that could impact Cloudflare, which counts some popular crypto exchanges among its clients.
Still, Cloudflare continued to report strong revenue growth last year. In Q3 — its most recently reported quarter — its top line rose by 47% year over year as it surpassed $1 billion in annualized revenue.
AI is, indeed, a tailwind that investors should pay attention to over the long term. Two years ago, Cloudflare partnered with Nvidia to deploy graphics processing units (GPUs) to run AI-based applications on edge servers in the company’s data centers around the world.
Overall, management believes its total addressable market will expand by 35% over the next few years to $135 billion as it continues to introduce new services for its network customers. The stock might look expensive based on its current price-to-sales ratio of 23, but the company’s rate of growth and its opportunities to expand its service offerings could prove to be incredibly valuable over time.
John Ballard has positions in Cloudflare. The Motley Fool has positions in and recommends Apple, Cloudflare, and Nvidia. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.