We recently published a list of 10 AI Stocks to Watch for the Rest of 2024. In this article, we are going to take a look at where Cloudflare, Inc. (NYSE:NET) stands against other AI stocks to watch for the rest of 2024.
Talking about the latest market situation during a program on CNBC, Julian Emanuel, Evercore ISI senior managing director, said that despite the ups and downs that have happened since the pandemic, the US remains an economy that is “envy of the world.” The analyst urged investors to pile into stocks that have historically performed well after the Fed started cutting rates and hinted at the expected “turbulence” related to US elections.
“We love what we call the Fed rate cut playbook. You go back to 1970, you look at all the rate cutting cycles, there’s a very pronounced outperformance in the year after the Fed starts cutting from info tech, surprise surprise. Small caps, which might be a bit counterintuitive considering how much they took it on the chin today, but also, barbelled by the more defensive sectors, consumer staples and health care. So, to us, that’s sort of the sensible way that will help you ride out if you get some turbulence, which, obvious, if there’s a contested outcome, you’re likely going to get some turbulence.”
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Pointing to market volatility, Emanuel said that the “wall of worry” is still strong.
“The wall of worry is still very, very intact. And if you think about it, yeah, the VIX is low compared to maybe longer run history, but actually, if you think about the inertia of the markets the last several weeks, the VIX is high, and it should be, in front of probably one of the biggest unknowns we’ve been facing, certainly in the last four years, if not longer.”
For this article we picked 10 AI stocks trending based on latest news. With each company we have mentioned the number of hedge fund investors. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A close-up of a server array powering a cloud-services system.
Cloudflare Inc (NYSE:NET)
Number of Hedge Fund Investors: 39
Oppenheimer warns that the growing demand for data centers is expected to surpass infrastructure capacity, potentially leading to shortages in 2025. The surge in large language models and AI applications, which need vast computing power, is driving this demand.
“The hyperscalers are still locked in an LLM war where there is a shortage of infrastructure for training, which is helping with datacenter pricing,” said Oppenheimer analyst Timothy Horan in a note.
“Checks indicate extremely strong hyperscaler datacenter demand, and we will likely run out of capacity next year,” he added. “Positively, enterprises realize data is the new oil and will require migration to the cloud to enable AI. Everyone is trying to balance latency, cost, and accuracy, which often need smaller models.”
Oppenheimer named Cloudflare Inc (NYSE:NET) among the second derivative plays in the data center race poised to benefit.
How can Cloudflare Inc (NYSE:NET) benefit from AI? Being a key internet and Cloud infrastructure company, Cloudflare is positioned to benefit from the huge spending in AI. For example, Apple is launching a Private Cloud Compute (PCC) infrastructure to integrate AI features into its devices. Apple’s PCC will use its own silicon and employ RSA Blind Signatures for secure connections, relying on third-party providers like Cloudflare Inc (NYSE:NET) for encrypted communication. Morgan Stanley analysts estimate Cloudflare could generate up to $100 million annually from handling Apple’s AI queries.
Last month the company posted strong quarterly results and outlook, prompting Guggenheim to raise its price target.
Analyst John DiFucci of Guggenheim noted that Cloudflare Inc (NYSE:NET) business showed signs of a turnaround after more than a year of slowing momentum. Cloudflare Inc (NYSE:NET) reported an 11% increase in adjusted new annual recurring revenue, following declines in the previous two quarters. DiFucci attributed the improvement to changes in Cloudflare Inc (NYSE:NET)’s go-to-market strategy and growth in its enterprise deals, particularly those involving Cloudflare Workers.
“We’ve always respected Cloudflare Inc (NYSE:NET) vision and product lineup but questioned if its product-led approach was right as it targeted larger markets,” DiFucci wrote. He added that while this quarter’s results are positive, it’s too early to call it a lasting trend.
However, DiFucci maintained a Sell rating on the stock but raised the price target from $50 to $57.
Baron Fifth Avenue Growth Fund stated the following regarding Cloudflare, Inc. (NYSE:NET) in its Q2 2024 investor letter:
“Cloudflare, Inc. (NYSE:NET) provides content delivery network services, cloud cybersecurity, denial-of-service mitigation, Domain Name Service, and ICANN-accredited domain registration services. Shares fell 14.4% during the quarter on remarks from the CEO about worsening macro conditions, citing the negative impact of geopolitical uncertainties on customer buying behavior. On the positive side, the company posted strong quarterly results with revenue growth of 30% year-over-year, showing evidence that the changes to the company’s go-to-market strategy were resonating with solid growth across its large customer cohorts (revenues from customers spending over $100,000 represented 67% of the total, up from 62% in the first quarter of 2023), double-digit improvement in sales productivity, and new pipeline attainment ahead of plan. Cloudflare reiterated revenue guidance for the year on resilience in cybersecurity spend. While we fine-tuned our model on the back of the company’s increased macro headwind commentary, pushing out revenue reacceleration estimates from the second quarter of 2024 to the first quarter of 2025, this is still ahead of guidance. We retain conviction in the long-term thesis: a strong founder-led business with a unique global network and significant pricing advantages powering a disruptive multi-product growth story with improving margins. We therefore remain shareholders.”
Overall, NET ranks 9th on our list of AI stocks to watch for the rest of 2024. While we acknowledge the potential of NET, our conviction lies in the belief that under the radar AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than NET but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
