Cloudflare Inc. NET shares have surged 64.8% in the past six months, outperforming the Zacks Internet - Software industry’s appreciation of 34.3%. The stock also outperformed its peers, including F5 Inc. FFIV, Zscaler ZS and Check Point Software CHKP. Shares of F5 and Zscaler have returned 47.6% and 40.9%, respectively, while Check Point Software shares have plunged 12%.
The outperformance of Cloudflare shares raises the question: Does it still have room to run, or is it time for investors to consider taking profits? Let’s find out.
6-Month Price Return Performance
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AI Security Demand Boosts Cloudflare's Zero Trust & SASE Growth
Cloudflare is seeing growing interest in its Zero Trust and SASE products as enterprises look to secure the increasing use of artificial intelligence (AI) agents. During the second-quarter 2026 earnings call, management said the biggest reason large companies are reaching out is that they know they need to adopt AI but want to do so securely. As businesses deploy more AI agents, they will need security controls that can protect these agents, along with their human users. This is creating a new opportunity for Cloudflare’s security business.
Cloudflare believes its approach to securing AI agents can help its Zero Trust and SASE platforms gain market share. The company said many traditional Zero Trust vendors continue to focus mainly on human users, while Cloudflare is building its security model around the growing number of AI agents that enterprises will use. In one example, a large U.K. government agency was evaluating a first-generation Zero Trust provider but reconsidered the project after discussing its plans for AI agents with Cloudflare. The agency canceled its existing request for proposal and is now reevaluating the project with an agents-first approach.
The shift toward AI agents could also strengthen demand for Cloudflare’s broader security platform. Management said the company’s SASE and Zero Trust platforms have gained share significantly over the past six months, helped by its developer platform and its focus on AI. Cloudflare’s developer platform gives it a direct connection to companies building and deploying AI agents, creating opportunities for the company to bring security services into these workloads as they scale.
The opportunity comes as AI-driven traffic is expanding rapidly across Cloudflare’s network. More than 50% of the traffic on the network was nonhuman in the second quarter, while more than 80% of major AI companies are already Cloudflare customers. As enterprises deploy more AI agents, the need to secure their identities, access and activity could increase demand for Zero Trust and SASE solutions. The Zacks Consensus Estimate for Cloudflare’s 2026 and 2027 revenues indicates year-over-year growth of 32.3% and 28.5%, respectively.
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Large-Customer Gains Boost NET's Growth Prospects
Cloudflare is seeing strong momentum among its largest customers, which is driving strong revenue growth and customer retention. In the second quarter of 2026, the company ended with 4,698 customers generating more than $100,000 in annual revenues, up 27% year over year. Cloudflare added 282 large customers during the second quarter and a record 986 net additions in large customers year over year. Each large-customer group, from $100,000 to more than $5 million in annual revenues, posted record year-over-year net additions in the second quarter of 2026.
Large customers are also becoming a bigger part of Cloudflare’s business. They accounted for 73% of total revenues in the second quarter, up from 71% a year ago. Strong expansion among these customers helped push dollar-based net retention to 120%, up from 118% in the previous quarter and 114% a year ago. This shows that existing customers are increasing their spending on Cloudflare’s products, while the company continues to add new large accounts.
The strong performance of large customers is supporting Cloudflare’s overall financial growth. Second-quarter revenues increased 36% year over year to $696.1 million. Management said new customer bookings grew at their fastest rate in more than five years, while pipeline generation increased at its fastest sequential pace in five years. Cloudflare added more than 80,000 paying customers during the second quarter, resulting in 74% year-over-year growth in its paying customer base.
The company is also seeing customers adopt multiple products, including its developer platform, Zero Trust and application security offerings. Some customers also replaced several legacy tools with Cloudflare's broader platform, giving the company more opportunities to increase spending within existing accounts. Overall, continued growth in large customers, higher spending from existing accounts and stronger adoption across Cloudflare's product portfolio could help support the company’s revenue growth in the near term.
Rising Costs Weigh on Cloudflare’s Margins
Cloudflare’s non-GAAP gross margin was 73.1% in the second quarter of 2026, down 320 basis points from 76.3% a year ago. The main issue is the changing mix of traffic on Cloudflare’s network. As paid traffic grows relative to free traffic, a larger portion of Cloudflare’s network costs is being allocated to cost of revenue. This shows that Cloudflare is handling more traffic that requires infrastructure and network resources, and this is putting pressure on the company’s gross margins.
This is particularly relevant as Workers, AI workloads and machine-to-machine traffic expand. These workloads can drive more usage and revenues, but they also require Cloudflare to provide more compute, network and storage capacity. Although management expects gross-margin pressure to stabilize, continued growth in AI and developer workloads could require higher infrastructure spending. This could limit near-term margin expansion even as revenues continue to grow rapidly.
NET's Premium Valuation Warrants a Cautious Approach
Cloudflare is currently trading at a higher price-to-sales (P/S) multiple compared with the industry. NET’s forward 12-month P/S ratio sits at 35.28X, higher than the industry’s forward 12-month P/S ratio of 4.42X. The Zacks Value Score of F also suggests that NET stock is overvalued.
NET Forward 12-Month P/S Ratio
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The stock trades at a premium valuation to other industry peers, including F5, Zscaler and Check Point Software. At present, F5, Zscaler and Check Point Software have P/S multiples of 7.05X, 7.93X and 4.54X, respectively.
Conclusion: Hold Cloudflare Stock Right Now
Cloudflare’s Zero Trust and SASE businesses are benefiting from growing demand for AI security, while strong large-customer growth, higher customer spending and rising AI-related traffic support the company’s revenue outlook.
However, Cloudflare’s gross margins remain under pressure as higher paid traffic, AI workloads and Workers usage increase infrastructure costs. Further, the company’s premium valuation warrants a cautious approach to the stock.
Currently, Cloudflare carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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This article originally published on Zacks Investment Research (zacks.com).