Cloudflare Powers 20% of the Internet — So Why Only 4/9 on Buffett's Scorecard?

What Is Cloudflare?

Cloudflare, Inc. is a cloud connectivity company that sits between the internet and roughly 20% of all websites on earth. When you load a page, that request often passes through Cloudflare's global network before it ever reaches the origin server — and in that fraction of a second, Cloudflare is filtering threats, accelerating delivery, and logging data that makes the whole experience faster and safer. The company operates one of the largest distributed networks in the world, with over 330 data center locations across more than 120 countries.

The business has evolved well beyond its origins as a content delivery network (CDN) and DDoS protection service. Cloudflare today is positioning itself as the "connectivity cloud" — a unified control plane for network security, zero trust access, serverless computing (Workers), AI inference at the edge, and developer storage (R2). Its product portfolio spans SASE (Secure Access Service Edge), web application firewalls, DNS, email security, and a fast-growing developer platform that lets companies build and deploy applications directly on Cloudflare's infrastructure without managing their own servers.

Revenue is growing at approximately 28–30% annually, with full-year 2025 revenue crossing roughly $2.4 billion and Q4 2025 alone posting $614.5 million. For 2026, management guided for approximately $2.79 billion — another 28–30% growth year. The company's customer base includes more than 200,000 paying customers, with a growing share of enterprise accounts spending over $100,000 annually. That enterprise cohort now represents roughly 65% of total revenue and is the fastest-expanding segment of the business.

How Cloudflare Scores on All 9 Buffettology Criteria

Cloudflare earns a 4 out of 9 on the Buffettology framework. That's a meaningful score for a high-growth infrastructure company — it signals real business quality — but it also reflects clear gaps in profitability and valuation that Buffett's framework is specifically designed to catch. Here's the full breakdown.

1. High Return on Equity — FAIL

Buffettology requires a return on equity above 12%, sustained over time. Cloudflare's ROE is currently negative, because the company is still reporting net losses. Net income for the trailing twelve months came in at approximately -$102 million. Until Cloudflare achieves consistent GAAP profitability, this criterion cannot pass — regardless of how strong the underlying business is.

The good news: this gap is narrowing. Cloudflare reached a milestone in 2025 by achieving sustained GAAP operating profitability for the first time, which is a meaningful step toward eventually meeting this threshold. But the stock earns no credit for progress — only results.

2. High Return on Invested Capital — FAIL

ROIC must exceed 9% to pass. Like ROE, this metric requires net income to be positive before it can produce a meaningful positive reading. With a -9.28% operating margin on a TTM basis, Cloudflare's ROIC remains negative. The company is investing aggressively — in infrastructure, sales, and AI capabilities — and the returns on that capital haven't yet exceeded its cost. This is a critical gap in the Buffettology profile.

3. Cash Machine — PASS

This criterion looks at free cash flow generation relative to the company's asset base. Despite its GAAP losses, Cloudflare generates substantial free cash flow: approximately $287.5 million on a trailing basis, representing a healthy 13–15% FCF margin on revenue. This is the hallmark of a business with a capital-light model at its core — the product doesn't require heavy capital expenditure per dollar of revenue, even as the network grows. Cloudflare passes here and passes comfortably.

4. Fair Valuation — FAIL

The fair valuation criterion requires an earnings yield (the inverse of the P/E ratio) of at least 3.5% — roughly equivalent to a P/E below 28x. Cloudflare's forward P/E is approximately 142x, which translates to an earnings yield of just 0.7%. The stock carries a P/S ratio of 26x against a sector average well below 10x. Even with strong growth expectations baked into the price, Cloudflare does not clear Buffett's valuation bar. It isn't close.

5. Share Buybacks — FAIL

Buffett favors companies that shrink their share count through buybacks, signaling confidence in the business and returning capital to long-term owners. Cloudflare does the opposite: its share count has been growing steadily due to heavy stock-based compensation (SBC), which is a standard practice for high-growth technology companies but a structural negative under Buffettology. Until the company reaches a scale where buybacks offset SBC, this criterion will fail.

6. Defensible Moat — PASS

This is where Cloudflare's business quality truly shows up. A gross margin above 40% signals pricing power and a durable competitive advantage. Cloudflare's gross margin is 74.51% — nearly double the threshold and consistent with the best software businesses in the market. The company's network effect is real: as more customers use Cloudflare, its threat intelligence improves, its latency decreases, and its data flywheel becomes more valuable to new customers. The moat isn't just wide — it's being extended with each new service and each new customer.

7. Simple Business — PASS

Buffett's test here isn't about technological simplicity — it's about whether the revenue model is understandable. Cloudflare's business is straightforward: customers pay for network security, performance, and connectivity services. Enterprises pay monthly or annually for protection and access management. Developers pay usage-based fees for Workers and R2. The underlying technology is sophisticated, but the model — sell infrastructure services on a subscription and usage basis — is easy to understand and evaluate. Cloudflare passes this criterion.

8. Conservative Debt — PASS

Buffettology requires a debt-to-equity ratio below 1.5x. Cloudflare carries modest debt relative to its capital structure — primarily convertible notes — and its enterprise value of $55.79 billion is actually slightly below its market cap of $56.37 billion, implying the company holds more cash than gross debt. This net cash position reflects a balance sheet that doesn't rely on leverage to fund growth. Cloudflare passes here with room to spare.

9. Consistent Growth — FAIL

The final criterion looks for consistent growth in net income over the prior five years. Cloudflare's revenue growth has been exceptional — from roughly $287 million in fiscal year 2020 to over $2.4 billion in 2025, representing more than 8x growth. But net income growth is harder to celebrate: the company has been reporting GAAP losses throughout that entire period. Under Buffettology, consistent earnings growth matters more than consistent revenue growth. Cloudflare fails this criterion until sustained profitability is established.

The Bull Case

Cloudflare's Buffettology score of 4/9 doesn't capture everything that makes this company compelling. Bulls have a strong case:

The AI tailwind is structural, not cyclical. Cloudflare's Workers AI platform — which allows developers to run AI inference directly on its edge network — is the fastest-growing product in the company's portfolio. As enterprises shift workloads toward agentic AI applications, low-latency edge inference becomes increasingly valuable. Cloudflare is uniquely positioned as infrastructure for the "agentic internet," and its partnerships with hyperscalers and AI model providers give it distribution across the ecosystem.

The enterprise transition is accelerating. Cloudflare's land-and-expand model is working: customers spending more than $100,000 annually now represent approximately 65% of revenue and are growing faster than the overall base. As enterprises consolidate their network security and connectivity vendors, Cloudflare's unified platform — which replaces point solutions from multiple vendors — becomes more compelling. Net revenue retention has been consistently strong, indicating that existing customers are expanding their deployments.

Analyst consensus is solidly bullish. Of 26 analysts covering NET, 17 carry Buy or Strong Buy ratings, with consensus price targets implying approximately 46% upside from current levels. Goldman Sachs and Morgan Stanley have cited the company as a "top pick for the agentic era." 2026 revenue guidance of approximately $2.79 billion implies continued 28–30% growth — a rate that few companies at this scale sustain.

The path to profitability is becoming real. Cloudflare achieved sustained GAAP operating profitability in 2025 for the first time in its history — a milestone that was repeatedly pushed out in prior years. Free cash flow margins of 13–15% are already strong. If the company can continue converting revenue growth into operating leverage, GAAP net income could be achievable within a few years, which would unlock several of the failing Buffettology criteria simultaneously.

Geopolitical tailwinds support sovereign cloud demand. New data localization regulations in the EU (NIS-2), India, and elsewhere are creating structural demand for Cloudflare's network, which can route and process data in country-specific locations. This regulatory moat is difficult for competitors to replicate without equivalent global infrastructure.

The Bear Case

The 4/9 Buffettology score reflects genuine fundamental risks that investors should weigh carefully:

The valuation is among the most stretched in tech. A forward P/E of approximately 142x and a P/S ratio of 26x are exceptional even in a category known for premium multiples. Comparable security infrastructure companies trade at 30–60x forward earnings — Cloudflare's multiple implies years of flawless execution with no margin for error. A minor growth deceleration or macro rotation could compress the multiple substantially, even if revenues continue rising.

Stock-based compensation is a meaningful dilution headwind. Cloudflare issues a substantial amount of SBC to attract and retain engineering talent. This dilution erodes per-share value over time and is one of the reasons the company's GAAP losses persist even as non-GAAP metrics look healthier. Until SBC shrinks as a percentage of revenue, share dilution remains an ongoing headwind.

Network reliability and security incidents create reputational risk. Cloudflare experienced significant global service disruptions in late 2025, and a Web Application Firewall vulnerability was disclosed in January 2026 — even though Cloudflare had patched it months earlier. For a company whose entire value proposition is reliability and security, outages and disclosed vulnerabilities carry outsized reputational weight. A major breach would be an existential headline risk.

Sales execution risk is rising as the model shifts upmarket. Enterprise sales cycles are longer, lumpier, and more expensive than self-serve. As Cloudflare leans harder into the enterprise segment, quarterly results may become more volatile, and the sales and marketing costs required to close large deals will pressure operating margins in the near term.

The high-growth tech sector remains macro-sensitive. Cloudflare's premium multiple makes the stock one of the first to be sold during growth-to-value rotations. The stock fell 7.8% in a single session on February 23, 2026 — not on any company-specific news, but as part of a broader pullback in high-multiple technology names. Investors in NET need to be prepared for significant drawdowns that are disconnected from underlying business performance.

Valuation Overview

Cloudflare's valuation metrics are difficult to approach from a traditional framework, which is precisely why the Buffettology earnings yield criterion fails so clearly. Here's where things stand:

• Trailing P/E: Negative (company is unprofitable on a GAAP basis)
• Forward P/E: ~142x (FY2026 EPS estimate of ~$1.22)
• P/S Ratio: ~26x (vs. sector median of approximately 2–4x for IT broadly, and ~12.8x for software peers)
• P/FCF Ratio: ~196x
• PEG Ratio: ~3.86x (based on 5-year expected revenue growth of ~25%)
• EV/Sales: ~25.7x

For context, Cloudflare's own historical trading range has seen the stock trade as low as 10–12x forward revenue during the 2022 growth stock correction and as high as 60–70x forward revenue during the peak of the 2021 software bubble. Today's ~20x forward revenue valuation sits in the upper half of that historical range.

Analyst consensus points to a 12-month price target of approximately $234.58, with a range spanning $140 to $300. One discounted cash flow model (Simply Wall Street) estimates fair value near $232.78 — suggesting modest undervaluation if Cloudflare's long-term growth trajectory materializes as projected. However, this model is highly sensitive to terminal growth assumptions; a small change in discount rate or growth rate produces dramatically different outcomes.

The more balanced view: Cloudflare is not cheap by any traditional metric. The case for owning it rests entirely on the belief that 28–30% compound revenue growth continues for many more years and that margin expansion eventually translates into significant earnings power. That's a legitimate investment thesis — but it's a growth thesis, not a value thesis.

The Buffettology Verdict

Cloudflare's 4/9 Buffettology score tells a specific story: this is a high-quality business with a real and widening moat — but it is not, by Buffett's standards, a business you can buy at a margin of safety today. The passing criteria are genuinely impressive: a 74.5% gross margin, positive free cash flow, minimal debt, and a comprehensible business model. These are the traits of a company that could, eventually, become a Buffettology high-scorer.

The failing criteria are equally revealing. Negative ROE and ROIC reflect a company still investing ahead of its earnings power. A failing valuation criterion — with an earnings yield barely above 0.5% — reflects a market that is paying for years of future growth in today's price. And growing share dilution reminds investors that not all of Cloudflare's growth accrues proportionally to existing shareholders.

That doesn't make it a bad company. It may not make it a bad investment, depending on your time horizon and tolerance for multiple compression risk. But Buffett's framework exists precisely to filter out companies where you're paying for a future that isn't yet visible in today's numbers — and Cloudflare, for all its infrastructure dominance, hasn't cleared that bar yet.

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