AI-generated · cited to primary sources · not investment advice
Cloudflare, Inc. Class A Common Stock (NET) Mar 2026 Filing Analysis
Does management do what it says?
The company continues to report GAAP operating losses ($37.5M for Q3) and expects this trend to persist as it prioritizes strategic investments over short-term profitability. (2 in progress across 2 tracked commitments)
“The Company currently estimates that it will incur charges of between $140 million and $150 million in connection with the Plan, consisting primarily of cash expenditures for notice period, severance payments, employee benefits and related costs of between $105 million and $110 million and non-cash expenses related to vesting of share-based awards of between $35 million and $40 million.”
Management expects gross margin to remain consistent over the long term despite period-to-period fluctuations. — target: Consistent (+2 more commitments)
“We expect our gross profit to increase in absolute dollars and our gross margin to remain consistent over the long term, although our gross margin could fluctuate from period to period depending on the interplay of all of these factors.”
See the full cited Management analysis of Cloudflare, Inc. Class A Common Stock
How durable is the business?
The network effect moat is being actively strengthened through a strategic shift to an 'agentic AI-first' model, leveraging the massive data from the free customer base to train AI models. (1 expanding)
“These free customers expose us to diverse traffic, threats, and problems, often allowing us to see potential security, performance, and reliability issues at the earliest stage. This knowledge allows us to improve our products and deliver more effective solutions to our paying customers.”
Channel partners are expanding their share of the revenue mix, growing from 19% to 25% of total revenue, indicating successful leverage of resellers and system integrators. (4 expanding, 1 contracting across 1 engine)
“Channel partners $ 192,960 [representing] 30 % [of revenue]”
Direct customer revenue share has contracted from 81% to 75% of total revenue, despite absolute dollar growth, as the company shifts more volume toward channel partners. (3 contracting, 2 expanding across 1 engine)
“Direct customers $ 446,795 [representing] 70 % [of revenue]”
The Asia Pacific region is expanding its share of total revenue, growing from 13% to 15% year-over-year. (3 expanding, 2 contracting)
“United States $ 315,830 [representing] 49 % [of revenue]”
Cloudflare's massive global network creates a significant cost advantage. By placing equipment directly inside Internet Service Provider (ISP) data centers, they lower their own bandwidth costs while making their service faster for customers.
“Given the large customer base we have and the immense amount of Internet traffic that we manage, we are able to negotiate mutually beneficial agreements with Internet service providers (ISPs) that allow us to place our equipment directly in their data centers, which drives down our bandwidth and co-location expenses.”
See the full cited Business Model analysis of Cloudflare, Inc. Class A Common Stock
Where does growth come from?
Revenue from channel partners (third-party resellers) is accelerating as a percentage of total revenue, growing from 14% to 19% of the total mix. This indicates a successful shift toward a partner-led sales model to reach more customers efficiently. (5 accelerating across 5 signals)
“Channel partners [Revenue] $192,960 [30% of revenue in 2026] ... $112,555 [23% of revenue in 2025]”
Cloudflare is maintaining a steady expansion of its global network infrastructure, now reaching over 330 cities, with a specific focus on adding GPU capabilities for AI workloads. (3 steady across 3 signals, 1 leading indicator)
“We intend to continue to make substantial investments in our global network infrastructure... including the addition of... servers with graphics processing units (GPUs) to support our AI-related developer platform products.”
Cloudflare acquired Replicate to integrate its AI platform, which helps developers run and deploy AI models more easily on the Cloudflare network.
“On December 1, 2025, the Company acquired all of the outstanding shares of Replicate, a company that has developed an artificial intelligence (AI) platform that enables developers to deploy and run AI models”
The net retention rate, which measures how much existing customers increase their spending, is showing a slight acceleration compared to the previous year, indicating strong platform stickiness. (3 accelerating, 2 decelerating across 5 signals)
“Our dollar-based net retention rates were 118% and 111% for the three months ended March 31, 2026 and March 31, 2025, respectively.”
Cloudflare is showing steady growth in its large enterprise customer base, which is a key indicator of its ability to penetrate high-value accounts. The number of customers spending over $100,000 annually grew by 33.5% year-over-year. (5 steady across 5 signals)
“Paying customers (> $100,000 Annualized Revenue) ... 4,416 [as of March 31, 2026] ... 3,527 [as of March 31, 2025]”
See the full cited Future Growth analysis of Cloudflare, Inc. Class A Common Stock
What could break the thesis?
Cloudflare is undergoing a major restructuring to shift toward an AI-first business model, which includes cutting its workforce by approximately 20%. This transition could disrupt operations, hurt employee morale, and fail to deliver the expected cost savings or productivity gains. [EXECUTION]
“On May 7, 2026, the Company announced a plan (the Plan) designed to further accelerate its evolution to an agentic AI-first operating model. As part of the Plan, the Company expects to reduce its current workforce by approximately 20%. The Company currently estimates that it will incur charges of between $140 million and $150 million in connection with the Plan”
The risk remains high and active. The company disclosed a likely nation-state threat actor intrusion in November 2023 and continues to face large-scale DDoS attacks, such as the HTTP/2 vulnerability exploitation in late 2023. Management notes that defending against these evolving threats is becoming increasingly challenging. (2 intensifying, 1 high-severity)
“In November 2023, we detected that a likely nation-state threat actor had gained unauthorized access to one of our internal systems... we expect we will continue to be subject to similar threats of unauthorized access in the future”
Gross margin remains under pressure, stabilizing at 75% for the quarter compared to 78% in the prior year period. The decline is driven by increased depreciation from server acquisitions and higher network traffic costs. Cost of revenue grew 45% year-over-year, outpacing the 28% revenue growth. (1 stable, 2 easing, 1 intensifying, 1 high-severity)
“Gross margin decreased to 71% from 76%, for the three months ended March 31, 2026, compared to the three months ended March 31, 2025. The decrease in gross margin was primarily due to the increases in costs mentioned above.”
Governance risk has intensified as the co-founders' voting power has increased to approximately 51.9% as of June 30, 2025, up from the previously identified 49.9%. This grants them absolute majority control over all matters requiring stockholder approval. (3 intensifying)
“our co-founders together holding approximately 49.9% of the voting power of our capital stock. Because of the ten-to-one voting ratio between our Class B and Class A common stock, the holders of our Class B common stock collectively continue to control a majority of the combined voting power”
The risk is stable but remains high as the 2026 Notes are now classified as a current liability, meaning they are due within one year. The company issued $2 billion in new 2030 Notes to bolster liquidity, but the immediate obligation for the 2026 series persists. (1 stable, 1 high-severity)
“As of March 31, 2026, the Company classified the net carrying value of the 2026 Notes of $1,292.3 million as current portion of convertible senior notes, net.”
See the full cited Risk analysis of Cloudflare, Inc. Class A Common Stock
AI-generated informational research only. ThesisLoop is not investment advice, a stock recommendation, or a guarantee of returns.