Cloudflare (NET Quick QuoteNET - Free Report) shares have gained 6.1% in the past three months, outperforming the Zacks Internet Software Industry’s and the S&P 500 index’s return of 5.2% and 3.8%, respectively.

NET stock has also outperformed the Zacks Computer and Technology Sector’s decline of 1.7% in the same time frame. Cloudflare’s outperformance in the past three months reflects investors’ confidence in the company’s artificial intelligence (AI)-enabled portfolio strength, which is driving its financial performance.

Cloudflare recently expanded its AI-enabled portfolio by launching an AI Audit toolset that can be used by creators to monitor and set rules for the way in which their content is used by some other websites. This toolset helps creators track AI bots that crawl their websites to access their content.

Creators can use AI Audit to block AI bots that fetch data from their websites. In cases where the creators’ content has already been used by some other website, the AI Audit toolset can aid in protecting creators’ rights during negotiations. Cloudflare is also working on a feature to help content creators set a fair price for their content when used by AI companies for training and data generation.

Cloudflare Three Months Performance

Image Source: Zacks Investment Research

Cloudflare Enhances Its AI Capabilities

So far this year, NET has launched security products for AI, including Firewall for AI and Defensive AI. Firewall for AI protects Large Language Models from cyberattacks by providing a security layer. Defensive AI protects devices exposed to the Internet from AI-based cyberattacks.

In the past year, Cloudflare has also expanded in the AI space through partnerships with Hugging Face Hub, CrowdStrike (CRWD Quick QuoteCRWD - Free Report) , Microsoft (MSFT Quick QuoteMSFT - Free Report) and NVIDIA (NVDA Quick QuoteNVDA - Free Report) . Cloudflare’s collaboration with Hugging Face empowered developers with the capability to deploy AI applications on NET’s global network with just one click from Hugging Face.

Cloudflare’s partnership with CrowdStrike combined NET’s Zero Trust protection and CRWD’s AI-powered cybersecurity to prevent breaches on a large scale. Cloudflare has also partnered with many other industry leaders in 2024 to expand its capabilities beyond AI.

NET’s partnership with Microsoft was focused on enabling enterprise customers to deploy AI models across devices, network edges and cloud environments by leveraging ONNX runtime. In 2023, NET also announced its plan to use NVDA’s GPUs and Ethernet switches in its global network to bring AI close to its users.

Cloudflare Faces Competitive Challenges

NET operates in a highly competitive market that contains several large and established on-premises, appliance-based solutions and cloud-based services providers. Industry leaders like Palo Alto, Check Point, F5 and Fortinet, with their large infrastructure, escalate competitive challenges for Cloudflare.

The cybersecurity market has several new entrants seeking opportunities for capitalizing on the growing demand for security solutions driven by the rapidly growing IT space. To survive in the highly competitive cyber security market, each player must continually invest in broadening its capabilities.

Over the past few years, Cloudflare has invested heavily to enhance its sales and marketing capabilities, particularly by increasing its international presence. This has affected its operating margins.

Conclusion

The cybersecurity market in which Cloudflare operates is highly competitive. However, its recent expansion into the AI space might renew its growth afresh. Nevertheless, NET’s present valuation is highly stretched, as reflected by the Zacks Value Score of F. We suggest investors to wait for a better entry time. NET currently carries a Zacks Rank #3 (Hold) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.