Bernstein: Cloudflare (NET) Q4'25 — Twin Tailwind Acceleration into 2026
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Bernstein maintains a Market-Perform rating on Cloudflare while raising its target price from $131 to $146. The company reported fourth-quarter revenue of $614.5 million, reflecting 34% year-over-year growth. This represented the largest revenue beat since 2023, exceeding both consensus and estimate models by approximately 4% to 6%. The firm identifies twin structural tailwinds propelling this acceleration: a broad recovery in cloud consumption and strategic sales-driven transactions, particularly involving its Act II SSE product suite. Management projects this momentum will continue throughout 2026, modeling revenue growth reaching the mid-to-high 30% range by the second half.
Positive leading indicators from AWS partners reinforce an optimistic outlook for the first half of the year. Dollar-based net retention rebounded to 120%, marking a multi-year high. However, profitability metrics present mixed signals. Gross margins contracted to 74.9% due to evolving revenue mixes involving free tiers and developer products, falling below historical peaks near 80%. Additionally, capital expenditures consumed 13% of revenue, pressuring free cash flow margins despite stable non-GAAP operating margins. Partner-driven revenue has expanded from 10% to over 20% over two years, highlighting successful Zero Trust and SASE traction. Bernstein applies a blended valuation methodology, equally weighting a 10% WACC discounted cash flow analysis and a 16 times price-to-sales multiple.