Synopsis
Cloudflare shares dropped significantly after its revenue forecast missed investor expectations. The company is also reducing staff by 20%, citing increased use of AI tools. This move comes despite a strong rally in its stock. Analysts noted that rising AI infrastructure costs are impacting profit margins. However, some analysts remain optimistic about Cloudflare's future prospects.The networking and cybersecurity services provider will also lay off about 20% of staff due to greater use of AI tools, a move that Jefferies said could hurt near-term growth.
Following a 43% rally since its last quarterly results in February, analysts said expectations were high for the company, only for its forecast to flag slower growth as rising AI infrastructure costs squeeze margins.
Cloudflare said 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 said.
The AI-driven layoffs align Cloudflare with companies such as Jack Dorsey's Block, which have said the technology could change how work is done by automating tasks such as coding.
But experts and tech executives, including OpenAI CEO Sam Altman, have warned that companies are using 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 users of AI tools such as the autonomous agent known as Openclaw.
About four brokerages raised their price targets 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)
