Cloudflare shares are pricing in too much AI benefit, analysts say

Shares of internet infrastructure company Cloudflare (NYSE:) declined Monday morning following a report from equity analysts at UBS and a new “sell” rating on the stock. UBS issued a price target of $55, implying a downside of 22% from Friday’s closing price.

Shares of Cloudflare surged recently due to enthusiasm over the potential benefits from artificial intelligence. However, analysts don’t think expectations are in-line with near-term opportunity.

“…in light of the stock’s 70%+ rally in May, we think investors are pricing in too much near-term AI benefit (potentially CY24 revenues 25%+ higher than our estimates),” wrote UBS analysts in a note to clients.

They said Cloudflare’s distributed edge can play a role in the GenAI ecosystem longer-term, but he thinks near-term expectations are being conflated with the opportunities of companies more directly tied to centralized compute.

“In addition, while we are optimistic on opportunities in app security, edge compute and network security longer-term, we still see a challenging near-term setup due to potential go-to-market disruption, cloud optimizations, and a tough macro. With shares 17% higher than pre-1Q23 levels and trading at 14.5x CY24E EV/S (a 50% premium to peers and near the high end of all software), we see shares priced for perfection and already embedding any AI upside,” said analysts.

Shares of Cloudflare were down about 4% prior to the opening bell.