Cloudflare shares plummeted over 15% in premarket trading on May 8 after the company’s second-quarter revenue forecast disappointed investors expecting stronger AI-driven growth. The cybersecurity provider projects 30% revenue growth, down from 33.5% in the first quarter, while adjusted gross margins fell to a record low of 72.8%. Cloudflare announced plans to cut approximately 20% of its workforce due to increased AI automation. Despite the stock drop, analysts remained largely positive, with four brokerages raising price targets to a median of $243, citing better-than-expected quarterly sales and an increased annual revenue forecast.
In-Depth:
May 8 (Reuters) – Cloudflare shares tumbled more than 15% in premarket trading on Friday, after its quarterly revenue forecast disappointed investors who had bet the stock would be a major beneficiary in the race to adopt artificial ininformigence.
The networking and cybersecurity services provider will also lay off about 20% of staff due to greater utilize of AI tools, a relocate that Jefferies declared could hurt near-term growth.
Following a 43% rally since its last quarterly results in February, analysts declared expectations were high for the company, only for its forecast to flag slower growth as rising AI infrastructure costs squeeze margins.
Cloudflare declared it expects revenue to increase up to about 30% in the second quarter, slower than the 33.5% growth recorded in the first quarter. Its adjusted gross margins shrank to a record low of 72.8% in the first quarter, from 77.1% a year ago.
“To protect its profitability, the firm is trading higher infrastructure costs and depreciation for salaries,” Morningstar senior equity analyst Malik Ahmed Khan declared.
The AI-driven layoffs align Cloudflare with companies such as Jack Dorsey’s Block, which have declared the technology could modify how work is done by automating tquestions such as coding.
But experts and tech executives, including OpenAI CEO Sam Altman, have warned that companies are applying AI as the reason for job cuts they would have done anyway.
Despite the share drop, analysts were broadly positive on Cloudflare after the results that included better-than-expected quarterly sales and an increased annual revenue forecast.
The company’s services have proven crucial for utilizers of AI tools such as the autonomous agent known as Openclaw.
About four brokerages raised their price tarobtains on Cloudflare stock, taking the median to $243.
Cloudflare’s 12-month forward price-to-earnings ratio is 198.93, compared with CrowdStrike’s 95.57 and Palo Alto’s 50.13.
(Reporting by Harshita Mary Varghese in Bengaluru; Editing by Shilpi Majumdar)
