Cloudflare jumps as BofA gives the stock a two-notch upgrade

Cloudflare got a leapfrog upgrade from Bank of America analysts on Tuesday, who jacked their rating on the seller of website security and performance software to “buy” from “underperform,” bypassing the typical analytic pitstop at “neutral,” “hold,” or whatever happens to be the preferred house term of art. The analysts wrote:

“We think Cloudflare is poised to be one of the true ‘AI winners’ in software. It stands out by offering customers an alternative to building their own capacity — an expensive and inefficient task. AIaaS [AI as a service] is already resonating with customers; our surveys show AI is the leading product Cloudflare customers are looking to adopt in the NTM, with average AI spending forecast to increase +8% to $100k per customer, or 15% of total customer spending. Further, customers are increasingly choosing Cloudflare over hyperscalers like AWS (Amazon Web Services), Oracle and Azure given ease of use, scalability and utilization benefits.”

BofA’s analysts are sticking their neck out somewhat on this call, which isn’t consensus.

According to FactSet, Wall Street opinion on the company is fairly divided, with less than 40% of analysts labeling the stock — which is trading at a seemingly absurd valuation of 146x expected earnings and 19x expected sales — a buy.

But more broadly, BofA’s read on Cloudflare is part of a Wall Street-wide effort to dig up stocks likely to benefit from the next phase of AI’s integration into the economy, now that excitement over the early winners, like Nvidia, seems to be petering out a bit. We recently spotlighted a Goldman note on a similar topic with a list of potential AI winners that included the stock, among others such as Palantir and Spotify.