Analysts issue routine upgrades and downgrades every trading day of the year. What is not routine in those hundreds of daily analyst calls is when analysts issue a “double upgrade.” This is taking a stock from a “Sell” to a “Buy” rather than a routine upgrade from “Neutral/Hold.”
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BofA Securities has issued a rare double upgrade for Cloudflare, Inc. (NYSE: NET). Actually, because of the price target change and the severity of the change, this may look more like a triple-upgrade or a quadruple-upgrade.
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BofA’s Madeline Brooks and Tal Liani raised Cloudflare to Buy from Underperform and the team’s price objective was hiked all the way up to $160 from a prior $60 level. This is a huge and rare reversal of tone and price target severity. What also stands out is that it’s after Cloudflare’s stock has plunged by more than 30% over the last month alone.
Tactical Bulls always reminds its readers that no single analyst call should ever be the sole basis for buying or selling a stock. Analyst reports can be wrong or sometimes the fundamentals can change in an instant. This caveat or warning is also tru for double upgrades and even stronger upgrades.
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BofA is citing improving fundamentals, with its AI soaring higher as clouds clear for the company. The analysts also cite Cloudflare’s growth acceleration, a differentiated approach to AI, and also a growing momentum in network security with its Secure Access Service Edge.
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What may also stand out in this call for tactical investors looking for continued gains is that the analysts see a high probability of Cloudflare becoming the leader in AI-as-a-Service. The report says:
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 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.
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And while double upgrades are rare, there are at least some risks to consider. BofA pointed out that for Cloudflare to reach $5 billion in 2028 that it implied a reacceleration of revenue to the tune of about 400 basis points higher than its peer group’s growth forecasts. One key issue is that AI could take longer to contribute materially to revenues based on 1) the market’s nascency and 2) pricing strategies.
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BofA is forecasting that earnings (per share) will rise to $0.98 in 2025 from $0.75 in 2024 and $0.20 in 2023 — all the way up to $1.49 in 2026 and then to $1.96 in 2027. With a share price of well over $100 that does put this stock in the high-valuation category even for tactical investors who are looking for outsized opportunities for gains. BofA also addressed the higher valuation premium to peers directly:
We think the premium is justified given Cloudflare’s strong growth profile, strength in security and, most importantly, the opportunity in AI with its differentiated AIaaS offering, which should propel revenue growth to >30% by 2028, above current estimates of 28.5% growth and above our previous estimate of 25%.
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While Cloudflare shares were up just 2.5% at $127.00 after the BofA double upgrade, this was just a $115 stock 5 days ago. It should also be pointed out that Cloudflare’s stock was above $175 just over a month earlier than this report was issued. Its market cap is $43 billion and its 52-week range is $66.24 to $177.37.
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Tactical Bulls has no formal ratings and does not maintain any price targets of its own regarding Cloudflare’s stock. And to keep this one analyst call from only representing one side of the coin, here are the other analyst target and/or ratings changes seen during March/2025:
3/20 Oppenheimer resumed as Outperform with a $150 price target.
3/14 Goldman Sachs maintained Buy, target cut to $161 from $183.
3/13 RBC maintained Outperform, target cut to $148 from $170.
3/13 Needham & Co. maintained Buy, target cut to $145 from $185.
3/13 UBS reiterated Neutral, target still cut to $135 from $165.
3/13 Piper Sandler reiterated Neutral, target still cut to $131 from $153.
Categories: Investing