Morgan Stanley is bullish on Cloudflare (NET.US) ahead of earnings: strong AI-related demand, and growth sustainability supports the high valuation.

Morgan Stanley has released a Q3 earnings preview report on Cloudflare (NET.US), maintaining an "Overweight" rating on the stock with a price target of $370. The firm believes that rising consumption, accelerating developer adoption, and AI/agentic workloads are providing Cloudflare with multiple growth levers that could support revenue growth in the mid-30% range for Q3, Q4, and 2027. The latest partner checks show robust demand across CDN/application security, Workers, SASE, and the broader AI space, a healthy pipeline, and continued large-deal activity. Multiple growth levers support 35% revenue growth The report states that Cloudflare's underlying fundamentals continue to accelerate. The latest partner checks show strong demand across CDN/application security, Workers, SASE, and the broader AI space, a healthy pipeline, and continued large-deal activity. Among these, Workers remains a key area of strength, with rising utilization and consumption, and larger, multi-year enterprise deployments emerging; SASE is also participating in more zero-trust and network modernization opportunities but remains a smaller growth driver relative to CDN/application security and developer services; on the AI front, Cloudflare is increasingly involved in enterprise agentic architecture, agent-to-agent communication, and edge inference discussions. Rising consumption and accelerating developer adoption are key growth levers. The report also notes that Cloudflare's opportunity does not require large-scale capital expenditure, given its global network and target workloads that are lightweight and distributed, consistent with management's commentary. Enterprise execution and developer platform momentum also provide support. The report states that despite the expensive stock price, it holds a positive bias toward Cloudflare's Q3 results: momentum remains strong across all parts of the platform, pipeline visibility is healthy, and large-deal activity continues; particularly in CDN/application security and Workers/developer platform, partners continue to see rising utilization and consumption alongside traffic growth. On the developer platform front, Cloudflare recently surpassed 10 million developers, up from over 7.4 million in Q2, over 5.5 million in Q1, and over 4.5 million at the end of 2025, implying over 5.5 million developers added year-to-date versus only about 1.5 million for all of 2025; developer platform ARR grew 137% year-over-year in fiscal 2025. As inference and enterprise AI deployments advance and AI/agentic workloads increase, demand for the developer services platform, security, and CDN is expected to rise further. On valuation, Cloudflare trades at roughly 30x forward P/S, versus an average of about 19x for high-growth SaaS peers. The report believes Cloudflare's valuation remains elevated with high expectations, but the potential to sustain mid-30% growth in Q3/Q4 and 2027 helps support its premium valuation. Q3 earnings focus areas: consumption, AI capex, and AI Gateway The report lists several key focus areas for Cloudflare's Q3 earnings: Rising consumption provides an additional growth lever. In addition to continued enterprise sales momentum, rising consumption is viewed as an important incremental driver for Q3. Management said in Q2 that variable revenue is accelerating, customers are consuming their Pool of Funds commitments faster, and some customers are renewing early; the report expects this trend to continue this quarter. As consumption-based products such as Workers increase their mix, continued utilization gains could provide additional upside to Q3 revenue. Healthy large-deal activity and improving enterprise sales productivity also provide additional leverage. Developer platform adoption is accelerating in tandem with product innovation. The report notes that the number of platform developers is rising rapidly, with developer platform ARR growing 137% year-over-year in fiscal 2025. Accelerating developer adoption, continued product innovation, and an expanding developer ecosystem are reinforcing each other, further solidifying Cloudflare's position within the developer community; especially as AI-generated code and agentic workloads grow, more applications and workloads are running on Workers and the broader developer platform. Capturing the AI opportunity does not require hyperscaler-like capital expenditure. Hyperscalers are investing heavily in large centralized GPU clusters for model training and compute-intensive inference; Cloudflare peer Akamai is building distributed infrastructure to run inference workloads directly in the network; Cloudflare, by contrast, is focused on infrastructure around inference and agentic applications, including Workers for compute, AI Gateway for model routing, R2 for storage, and security for AI traffic. Cloudflare can leverage its existing global network (over 340 POPs) to support these relatively lightweight, distributed workloads, limiting upfront infrastructure investment. Management expects network capex at roughly 14%15% of revenue in fiscal 2026, versus about 13% in fiscal 2025. The report believes the bigger constraint on near-term AI-related growth is the timing of monetization rather than capacity; many applications are still in early production stages and need higher consumption levels to contribute more to overall growth. AI Gateway could become an important control point in the multi-model era. As enterprises increasingly use multiple models and vendors, AI Gateway sits between applications and models, providing a common layer for routing, observability, security, and cost management. Cloudflare recently launched Auto Router, which automatically evaluates requests, balances quality and cost, and routes requests to sufficiently capable models; internal testing shows savings of up to 30% compared with relying entirely on frontier models. The report believes model selection is shifting from a one-time development decision to continuous optimization, giving Cloudflare an opportunity to capture more of the routing and control layer and participate in growing AI traffic, regardless of where the underlying inference ultimately runs.