Cloudflare, Inc.

(New York Stock Exchange)
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Somewhat Bearish -25

Cloudflare Sinks 14% and Datadog 13% in a Week as Software Selloff Hits Cloud Stocks

Company update New AI features Security vulnerability AI-generated analysis

πŸ“‰ Cloudflare shares fell 14% to $280.70 over the week ending Oct. 30 as a broader software selloff impacted the stock despite no weak company-specific results.

πŸ›‘οΈ A security disclosure revealed that a bug in a Workers AI model sent 155 responses containing other customers' data between Aug. 27 and Sept. 9, though the issue was fixed by Sept. 9.

πŸ“ˆ Cloudflare is guiding for 31% revenue growth to $736M-$737M in Q3 with adjusted EPS of $0.34, reporting before the market open on Nov. 5.

πŸ’° Gross margins declined to 74.5% GAAP and 73.1% non-GAAP in fiscal 2025 compared to a year earlier due to increased traffic costs.

πŸ“Š The stock trades at near 190x forward earnings, significantly above its 173x average since mid-2023, requiring a clean quarter to support the price.

πŸš€ Management expects to generate its first revenue from agent payments by the fourth-quarter report expected in February.

Bullish Signals
  • Cloudflare reported no weak results despite a 14% stock decline, as the drop was driven by a broader sector selloff rather than company-specific performance issues.
  • The company fixed a security bug involving customer data exposure on Sept. 9 and confirmed there is no evidence of deliberate exploitation.
Risk Factors
  • A bug in a Workers AI model sent 155 responses containing other customers' data between Aug. 27 and Sept. 9, raising security concerns.
  • GAAP gross margins fell to 74.5% in fiscal 2025 from 77.3% a year earlier, with non-GAAP margins dropping to 73.1% from 76.3%.
Full Analysis
Cloudflare (NET) stock declined 14% in the week ending October 30, closing at $280.70, while Datadog fell 13%. Neither company reported weak financial results; both were caught in a broader software sector selloff triggered by concerns over AI disruption following reports from ServiceNow and Fortinet. The primary company-specific event for Cloudflare was a disclosure regarding a bug in one of its Workers AI models. Between August 27 and September 9, the issue sent 155 responses containing other customers' data to unintended recipients. The company stated it fixed the issue on September 9 and found no evidence of deliberate exploitation. Looking ahead, Cloudflare is scheduled to report earnings on November 5 with a consensus guide for revenue growth of 31% and gross margins near 73%. Analysts expect significant revenue expansion through 2028, but the stock currently trades at a premium valuation of approximately 190x forward earnings. Management aims to generate its first revenue from agent payments by the fourth-quarter report expected in February.