# Cloudflare (NET) Investment Thesis: Evaluating Growth in Cybersecurity and Network Infrastructure

> This investment thesis examines Cloudflare, Inc. (NYSE: NET), a leading provider of cloud connectivity, cybersecurity, and network infrastructure solutions. The analysis evaluates Cloudflare’s business model, management, future growth potential, key risks, and multiple scenarios to assess what could shape the company’s long-term investment outlook.

**Companies**: Cloudflare, Inc. Class A Common Stock
**Sectors**: Technology
**Published**: 2026-08-30
**Last Updated**: 2026-08-30
**Source**: https://thesisloop.ai/thesis/cloudflare-net-investment-thesis-evaluating-growth-in-cybersecurity-and-network-b3f79674-e5f7-4676-a61f-d4755a3ada5f

## Score Overview

| Company | Management | Business Model | Future Growth | Risk |
|---------|-----------|---------------|--------------|------|
| Cloudflare, Inc. Class A Common Stock | 60/100 | 63/100 | 63/100 | 83/100 |

## Cloudflare, Inc. Class A Common Stock (NYSE:NET)

**Sector**: Technology | **Industry**: Cybersecurity & Network Infrastructure

### Management Credibility

- The workforce reduction was implemented at approximately the committed level, but the broader operating-model transition was still in progress and was expected to be substantially complete by the end of Q3. (1 in progress across 1 tracked commitment) (NEUTRAL, IN_PROGRESS)
  > At the 2026 Annual Meeting, our stockholders approved the elements of the Capitalization Changes that required stockholder approval. Subject to the litigation related to the Capitalization Changes described below, we anticipate implementing the Capitalization Changes as early as September 2026.
- **[CATALYST] M&A Consolidation** (NEUTRAL): Pursue complementary acquisitions and strategic transactions as part of the growth strategy. (+4 more commitments)
  > A significant part of our business strategy is to focus on long-term growth and to reinvest our cash flow from operations into our business, including the expansion of our global network, the development of new products and features, the expansion of our global workforce, and the potential acquisiti
- **[CATALYST] Margin Recovery** (NEUTRAL): Increase investment in sales and marketing to grow the customer base and brand awareness, while targeting lower sales-and-marketing expense as a percentage of revenue over the long term. — target: Decrease sales and marketing expenses as a percentage of revenue over the long term (+4 more commitments)
  > We plan to continue to invest in sales and marketing to grow our customer base and increase our brand awareness, including marketing efforts to continue to drive our pay-as-you-go business model. As a result, we expect our sales and marketing expenses to increase in absolute dollars for the foreseea
- **[CATALYST] Product Refresh** (NEUTRAL): Continue developing and enhancing existing products and launching new products and features to meet changing customer requirements, including AI-related requirements. (+1 more commitment)
  > We believe that the growth of our business and our future success are dependent upon many factors, including growing our paying customer base, particularly large customers, expanding our relationships with existing paying customers, developing and successfully launching new products and features, ex
- **[METRIC] Enterprise Customer Concentration** (NEUTRAL): Continue expanding sales to large enterprise customers and increasing the number of customers with more than $100,000 in annualized revenue.
  > We believe our ability to grow the number of large customers on our network provides a key indicator of growth of our business and our future business opportunities.
- **[METRIC] Gross Margin Mix** (NEUTRAL): Maintain gross margin consistency over the long term while growing gross profit in absolute dollars. — target: Gross margin expected to remain consistent over the long term (+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.
- **[METRIC] Net Retention and Module Attach** (NEUTRAL): Retain and expand existing paying-customer revenue through renewals, additional products, and increased usage.
  > Our ability to maintain long-term revenue growth and achieve profitability is dependent on our ability to retain and grow revenue generated from our existing paying customers. We believe that we will achieve these objectives by continuing to focus on customer loyalty and adding additional products a
- **[METRIC] Rule of 40 and FCF** (NEUTRAL): Maintain sufficient liquidity for at least the next 12 months using cash, investments, operating cash flow, and revolving-credit capacity. — target: Existing liquidity sufficient to meet working-capital and capex needs for at least 12 months
  > We believe that our existing cash, cash equivalents, available-for-sale securities, and available capacity under the Revolving Credit Facility will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months.
- **[TREND] AI Security Spend** (NEUTRAL): Increase research and development expenses in absolute dollars while targeting a lower R&D expense ratio over the long term. — target: Research and development expenses to decrease as a percentage of revenue over the long term (+4 more commitments)
  > We expect our research and development expenses to increase in absolute dollars for the foreseeable future as we continue to invest in research and development efforts to enhance the functionality of our global network and products. We expect our research and development expenses to decrease as a pe
- **[PRINCIPLE] Attack Surface Relevance** (NEUTRAL): Continue increasing R&D investment to enhance the global network and products, while targeting lower R&D expense as a percentage of revenue over the long term. — target: Decrease research and development expenses as a percentage of revenue over the long term (+3 more commitments)
  > We expect our research and development expenses to increase in absolute dollars for the foreseeable future as we continue to invest in research and development efforts to enhance the functionality of our global network and products. We expect our research and development expenses to decrease as a pe
- **[PRINCIPLE] Channel and MSSP Leverage** (NEUTRAL): Continue investing in direct sales, brand awareness, channel partners, and sales operations, particularly to acquire large enterprise customers. (+4 more commitments)
  > We continue to invest to build our direct sales force, increase brand awareness, leverage and expand channel partners, and improve the sophistication of our sales operations for contracted customers, particularly large customers.
- **[PRINCIPLE] Hardware-Software Mix** (NEUTRAL): Continue expanding the global network and product offerings, while increasing network capacity and infrastructure to support customer growth. (+1 more commitment)
  > As our customers expand and increase the use of our global network and products driven by additional applications and connected devices, we expect that our cost of revenue will continue to increase due to higher network and bandwidth costs and expenses related to operating in additional co-location 
- **[PRINCIPLE] Platform Consolidation** (NEUTRAL): Continue increasing the number of products and functionality offered on the platform to drive customer expansion and cross-selling. (+4 more commitments)
  > We believe that the growth of our business and our future success are dependent upon many factors, including growing our paying customer base, particularly large customers, expanding our relationships with existing paying customers, developing and successfully launching new products and features, ex
- **[TREND] Cyber Disclosure Regulation** (NEUTRAL): Continue maintaining and expanding certifications and compliance capabilities needed to serve government and large-enterprise customers.
  > Although we currently have certain certifications and reports such as SOC2 Type 2, PCI DSS, ISO 27001, ISO 27701, and ISO 27018, C5, EU Code of Conduct, Global CBPR, Global PRP, UK Cyber Essentials, ENS, FedRAMP Moderate authorization and IRAP Protected Level, we may not be successful in continuing 

### Business Model

- Asia Pacific was the fastest-growing reported region in share terms, rising one percentage point in the quarter and growing revenue by approximately 43% year over year. Its nine-month share also increased from 13% to 15%. (5 expanding) (POSITIVE, Change: EXPANDING)
  > 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-
- **[CATALYST] M&A Consolidation** (NEUTRAL): Cloudflare's technology moat comes from its globally distributed, programmable network, proprietary software, and accumulated operational knowledge from managing very large volumes of Internet traffic. The company had 390 issued patents and 75 pending patent applications as of June 30, 2026. Its recent acquisitions of Replicate and VoidZero also add AI-platform and developer-tool technology, although the filing says these acquisitions had no material impact on current consolidated results.
  > As of June 30, 2026, we had 390 issued patents and 75 pending patent applications in the United States and abroad.
- **[CATALYST] Margin Recovery** (NEUTRAL, Change: SHIFTED): Cloudflare's operating profitability weakened on a GAAP basis because restructuring charges were introduced in 2026. Excluding specified items, non-GAAP operating margin remained stable in the quarter and improved slightly for the first half. (1 shifted)
  > Non-GAAP operating margin 14% 14%... Operating margin (30)% (13)%... Restructuring and other charges 150,693.
- **[METRIC] ARR and RPO** (POSITIVE, Change: EXPANDING): Cloudflare remained a single-stream, recurring-revenue business. Subscription and support revenue accounted for substantially all revenue in both periods, while total revenue expanded 31% year over year in Q3 FY25. The latest filing does not provide a comparable Q4 FY25 or Q1 FY26 revenue figure, so no comparison to the later baseline is made. (5 expanding across 1 engine)
  > Subscription and support revenue is recognized over time and accounted for substantially all of the Company’s revenue for the three and six months ended June 30, 2026 and 2025.
- **[METRIC] Enterprise Customer Concentration** (POSITIVE, Change: EXPANDING): The network effect strengthened as the large-customer base expanded and more traffic generated operating data, threat visibility, and ISP value. Customers with more than $100,000 of annualized revenue increased 25.2%, from 3,527 to 4,416. This is evidence of a larger commercial network, although the filing does not separately quantify traffic growth. (1 expanding)
  > The number of paying customers with Annualized Revenue greater than $100,000 was 4,416 and 3,527 for the three months ended March 31, 2026 and March 31, 2025, respectively.
- **[METRIC] Gross Margin Mix** (NEGATIVE, Change: CONTRACTING): Revenue growth remained strong, but gross margin contracted as network delivery costs grew faster than revenue. Gross margin fell three percentage points year over year in both the quarter and first half. (1 contracting)
  > Gross margin decreased to 72% from 75%... The decrease in gross margin was primarily due to the increases in costs mentioned above.
- **[METRIC] Net Retention and Module Attach** (POSITIVE, Change: EXPANDING): The network effect continued to strengthen as paying customers, free users, and traffic scale expanded. Paying customers increased 33% year over year, while the company said free users supplied traffic diversity, real-world testing, brand exposure, and stronger ISP relationships. The later baseline also characterizes this moat as strong and widening. (4 expanding)
  > Our relationships with customers often start with servicing a portion of their overall needs and expand over time as they realize the significant value we deliver. Once a customer has adopted one product on our network, it can easily add additional products. As we add more products and functionality
- **[TREND] AI Security Spend** (NEUTRAL): Cloudflare operates a global network that companies subscribe to for website, application, and internal-system security, performance, and reliability; it reports one operating segment and generated $696.1 million of revenue in the latest quarter.
  > Cloudflare’s mission is to help build a better Internet. We have built a global network that delivers a broad range of services to businesses of all sizes and in all geographies—making them more secure, enhancing the performance of their business-critical applications, and eliminating the cost and c
- **[PRINCIPLE] Channel and MSSP Leverage** (POSITIVE, Change: EXPANDING): The revenue model showed a favorable shift toward contracted, partner-assisted revenue. Channel-partner revenue grew faster than direct revenue, increasing its share from 21% to 27% in the quarter. This is a meaningful distribution shift, although it also increases reliance on partners. (2 expanding, 1 shifted)
  > Additionally, through our pay-as-you-go offering, a customer can subscribe to one of our many plans and begin using our network quickly, with minimal technical skill and no professional services. This has allowed us to acquire a large portion of our paying customers very rapidly and at significantly

### Future Growth

- Cloudflare's network covered more than 320 cities and over 120 countries in Q1 2024, and the company stated that it intends to continue substantial infrastructure investment. Net property and equipment increased to $329.4 million from $322.8 million at year-end 2023, while server-network infrastructure rose to $361.3 million gross from $330.3 million. The filing also discloses $35.0 million of construction in progress and $45.9 million of future leases not yet commenced. Opportunity size: at least $35 million of construction in progress plus $45.9 million of committed future lease payments supports additional capacity. Trend: steady expansion, with no prior quarterly geographic data in this filing to establish acceleration. (3 new trend, 2 steady across 5 signals, 1 leading indicator) (POSITIVE, Trend: ACCELERATING)
  > International markets represented 49% and 51% of our revenue in the three months ended June 30, 2026 and 2025, respectively, and we intend to continue to invest in our international growth as a strategy to expand our customer base around the world.
- **[CATALYST] M&A Consolidation** (POSITIVE, Trend: NEW_TREND): Cloudflare acquired BastionZero in May 2024 for $13.1 million, adding a Zero Trust infrastructure-access platform. This is a newly disclosed product expansion with no material revenue contribution yet, so it represents a new growth initiative rather than an established revenue trend. (3 new trend across 3 signals, 1 leading indicator)
  > On June 1, 2026, the Company acquired all of the outstanding shares of VoidZero, Inc., a company that has developed high-performance toolchain technology, for a total purchase consideration of $164.2 million... On December 1, 2025, the Company acquired all of the outstanding shares of Replicate, Inc
- **[CATALYST] Margin Recovery** (POSITIVE, Trend: ACCELERATING): GAAP gross margin improved to 78% in Q1 2024 from 76% in Q1 2023. Non-GAAP operating margin also improved to 11% from 7%, while free-cash-flow margin rose to 9% from 5%. This reflects improving operating leverage, although Cloudflare remained loss-making under GAAP, with a $54.6 million operating loss. Opportunity size: each percentage point of margin on the $378.6 million quarterly revenue base is approximately $3.8 million. Trend: accelerating improvement in reported efficiency. (3 accelerating across 3 signals)
  > Gross margin 72% 75% ... Non-GAAP operating margin 14% 14% ...
- **[CATALYST] Product Refresh** (NEUTRAL, Trend: STEADY): Research and development spending increased 31.2%, from $87.7 million to $115.1 million, while R&D headcount increased 26%. This is a strong investment trajectory supporting new network features and AI-related products, but the document provides only one year-over-year comparison. (3 steady across 3 signals)
  > Research and development expenses increased by $27.4 million, or 31%, for the three months ended March 31, 2025 compared to the three months ended March 31, 2024. The increase was primarily driven by $25.0 million in increased employee-related costs due to a 26% increase in headcount in our research
- **[METRIC] ARR and RPO** (NEGATIVE, Trend: DECELERATING): Revenue reached $378.6 million in Q1 2024, up 30% year over year from $290.2 million. The filing says growth has slowed in recent periods, so the latest evidence supports continued strong but decelerating growth rather than acceleration. Opportunity size: the quarterly revenue base is approximately $379 million, or about $1.5 billion annualized. Trend: decelerating. (5 decelerating across 5 signals)
  > Revenue increased by $88.4 million, or 30%, for the three months ended March 31, 2024, compared to the three months ended March 31, 2023. The increase in revenue was primarily due to the addition of new paying customers... as well as the expansion within our existing paying customers... We have expe
- **[METRIC] Enterprise Customer Concentration** (POSITIVE, Trend: STEADY): Large-customer count rose to 2,878 in Q1 2024 from 2,156 in Q1 2023, an increase of approximately 33%. This is faster than total paying-customer growth of 17%, showing increasing penetration of larger enterprise accounts. Opportunity size: 2,878 customers each generating more than $100,000 annualized revenue implies a minimum annualized revenue pool of approximately $288 million, before considering customers above the threshold. Trend: positive and accelerating relative to the overall customer base. (1 accelerating, 4 steady across 5 signals)
  > The number of paying customers with Annualized Revenue greater than $100,000 was 4,698 and 3,712 for the three months ended June 30, 2026 and June 30, 2025.
- **[METRIC] Gross Margin Mix** (NEGATIVE, Trend: REVERSING): GAAP gross margin declined from 78% to 76%, while cost of revenue grew 35.9%, faster than revenue growth of 26.5%. Non-GAAP operating margin improved modestly from 11% to 12%, and free-cash-flow margin increased from 9% to 11%. The mixed picture indicates operating efficiency is improving on an adjusted cash basis, but infrastructure costs are pressuring gross margin. (2 decelerating, 3 reversing across 5 signals)
  > Gross margin 76% 78% ... Non-GAAP operating margin 12% 11% ... Free cash flow margin 11% 9%.
- **[METRIC] Net Retention and Module Attach** (POSITIVE, Trend: ACCELERATING): Existing-customer expansion improved materially, with dollar-based net retention rising from 110% to 119% year over year. This means the comparable customer base generated 19% more revenue before new customers, indicating an accelerating expansion engine. (3 accelerating, 2 decelerating across 5 signals)
  > Revenue increased by $183.7 million and $344.4 million, or 36% and 35%, for the three and six months ended June 30, 2026, compared to the three and six months ended June 30, 2025. The increase in revenue was primarily due to the addition of new paying customers, including growth in paying customers 
- **[TREND] AI Security Spend** (POSITIVE, Trend: NEW_TREND): Cloudflare maintained a network presence in more than 330 cities and over 125 countries. Capacity investment materially increased: net property and equipment rose 9.9% from $467.4 million at year-end 2024 to $513.9 million, while Q1 capital expenditures rose 168% year over year to $85.9 million. Management plans storage-capable servers and GPU-equipped servers for database and AI workloads. The expansion signal is newly quantified in this filing and appears to be accelerating. (2 accelerating, 3 new trend across 5 signals, 1 leading indicator)
  > We intend to continue to make substantial investments in our global network infrastructure to support the growth of our business, including the addition of servers with storage capabilities to support our storage and database products and servers with graphics processing units (GPUs) to support our 
- **[PRINCIPLE] Attack Surface Relevance** (POSITIVE, Trend: ACCELERATING): Research and development spending increased 14% in Q2 FY24 and 11% for the first six months of FY24. Engineering headcount increased 24% year over year. Investment is rising, but the six-month growth rate is lower than the quarterly growth rate, suggesting a steady-to-moderating pace rather than clear acceleration. (2 steady, 1 accelerating across 3 signals, 1 leading indicator)
  > Research and development expenses increased by $24.9 million, or 19%, for the three months ended June 30, 2026 compared to the three months ended June 30, 2025. The increase was primarily driven by $19.6 million in increased employee-related costs due to a 5% increase in headcount in our research an
- **[PRINCIPLE] Channel and MSSP Leverage** (POSITIVE, Trend: ACCELERATING): Channel-partner revenue increased to $70.5 million in Q1 2024 from $41.0 million in Q1 2023, a rise of approximately 72%. Its share of total revenue increased from 14% to 19%. This indicates channel partners are becoming a more important route to market. Opportunity size: channel partners represented $70.5 million in quarterly revenue, or approximately $282 million annualized. Trend: accelerating. (5 accelerating across 5 signals)
  > Channel partners $217,653 31% $130,415 25% ... Direct customers $478,408 69% $381,901 75% ... Total $696,061 100% $512,316 100%.
- **[PRINCIPLE] Hardware-Software Mix** (NEUTRAL): Growth could be constrained by shortages and higher prices for key server components, especially memory, enterprise SSDs, CPUs, and high-capacity hard drives. Management says AI infrastructure demand is redirecting manufacturing capacity toward hyperscale data centers, potentially delaying expansion and compressing margins.
  > We expect significant component shortages that may impact our server supply chain during the current year, particularly in memory products such as Dual In-line Memory Modules (DIMMs), as well as enterprise Solid State Drives (SSDs), Central Processing Units (CPUs), and high-capacity Hard Disk Drives
- **[PRINCIPLE] Platform Consolidation** (NEUTRAL, Trend: STEADY): Cloudflare continues to invest in new network features and products, including Cloudflare One, developer products, and usage-based Cloudflare Workers. Research and development expense increased 8% year over year to $87.7 million, while research-and-development headcount increased 12%. The company also increased sales and marketing investment by 42% to support product adoption. This is a continuing investment trend, but the filing provides no quarterly product-revenue or adoption data to prove that the initiatives are accelerating commercially. Opportunity size: $87.7 million of quarterly R&D spending, or approximately $351 million annualized, supports the product pipeline. Trend: steady investment. (1 steady across 1 signal)
  > Research and development expenses increased by $6.2 million, or 8%... primarily driven by... a 12% increase in headcount in our research and development organization. We expect our research and development expenses to increase in absolute dollars for the foreseeable future as we continue to invest i
- **[TREND] Zero Trust and SASE Adoption** (POSITIVE, Trend: NEW_TREND): Cloudflare acquired BastionZero in May 2024 for $13.1 million, adding Zero Trust infrastructure-access technology. This is a newly disclosed product-expansion action in the available filing; revenue impact was not material, so commercial traction remains unproven. (1 new trend across 1 signal)
  > In May 2024, the Company acquired all of the outstanding shares of BastionZero, developers of a Zero Trust infrastructure access platform, for total purchase consideration of $13.1 million.

### Risk Assessment

- This risk was intensifying during FY2025. Employees increased from 4,263 to 5,156, or about 21%, while operating expenses grew 26% from $1.446 billion to $1.823 billion. General and administrative expense rose 40%, sales and marketing 23%, and research and development 22%. The company also disclosed that a large portion of its sales team was new and that sales productivity had periodically declined since late 2022. The later baseline's workforce reduction introduces a different execution risk, but does not remove the earlier concern about scaling the organization. (2 intensifying, 1 emerging, 5 high-severity) (NEGATIVE, Risk: HIGH)
  > Based on the closing price of the Company's Class A common stock of $245.28 on June 30, 2026, the if-converted value of the 2026 Notes exceeded its principal amount by approximately $364.7 million... the Company classified the net carrying value of the 2026 Notes of $1,293.3 million as current porti
- **[CATALYST] Major Breach Cycle** (NEGATIVE, Risk: HIGH): The risk remains HIGH and appears more exposed because the network and product footprint continues to expand. Cloudflare disclosed a June 2025 outage caused by failure of third-party storage infrastructure, as well as historical outages, route leaks, DDoS attacks, and software defects. The company provides uptime commitments of up to 100%, increasing potential customer and contractual consequences if availability deteriorates. (4 intensifying, 1 high-severity)
  > For example, deployments of software updates to our global network resulted in widespread service unavailability on our network in November and December 2025 and we also have experienced a limited number of other network outages over the past five years due to a variety of causes.
- **[CATALYST] Margin Recovery** (NEGATIVE, Risk: HIGH): The risk was already HIGH in the prior year and remains HIGH. Revenue grew 31% in Q3 and 28% for the first nine months, but the nine-month operating loss widened from $120.0 million to $158.0 million and the net loss widened from $66.0 million to $90.2 million. The company continues to expect operating losses. This indicates that growth has not yet translated into GAAP profitability. (3 intensifying, 1 stable, 1 high-severity)
  > We have incurred net losses in all periods since we began operations and we may not achieve or maintain profitability in the future. We experienced net losses of $170.0 million and $50.4 million for the three months ended June 30, 2026 and 2025, respectively, and $192.9 million and $88.9 million for
- **[METRIC] ARR and RPO** (NEGATIVE, Risk: HIGH): The risk remains HIGH and is worsening in forward-looking terms despite strong reported growth. Revenue increased 31% in Q3 and paying customers increased 33% year over year, but management states that it has periodically experienced longer sales cycles, slower pipeline conversion, higher days sales outstanding, higher churn, delayed purchasing, and requests for payment or pricing concessions. International customers represented 50% of Q3 revenue, leaving the company exposed to global economic conditions, tariffs, restrictions, and a strong U.S. dollar. (1 intensifying, 1 stable, 1 high-severity)
  > We periodically have experienced lengthening of the average sales cycle for certain types of customers and sales... slowdowns in our pipeline of potential new customers and in the rate of converting sales pipeline opportunities into new sales, increases in average days sales outstanding, higher leve
- **[METRIC] Enterprise Customer Concentration** (NEGATIVE, Risk: HIGH): The risk remains HIGH but the available metrics show some improvement in customer expansion. Customers generating more than $100,000 of annualized revenue increased from 3,265 to 4,009, and dollar-based net retention improved from 110% to 119%. However, enterprise customers retain substantial negotiating power, may demand discounts or early termination rights, and can create significant quarter-to-quarter volatility if they reduce spending or do not renew. (2 easing, 1 intensifying, 1 high-severity)
  > Once we begin selling to a large customer or expand our sales to a large customer, if we fail to retain the large customer or to retain the same amount of sales to the large customer, then the adverse impact on our result of operations and financial conditions could be significant during any specifi
- **[METRIC] Gross Margin Mix** (NEGATIVE, Risk: HIGH): The risk is intensifying. For the nine months ended September 30, 2025, cost of revenue increased 45%, faster than the 28% increase in revenue. Gross margin fell from 78% to 75%. In Q3 alone, cost of revenue rose 52% while revenue rose 31%, and gross margin declined from 78% to 74%. Management specifically cited third-party technology costs, co-location and bandwidth costs, and server depreciation. (4 intensifying, 1 high-severity)
  > Cost of revenue increased by $67.9 million, or 53%, for the three months ended June 30, 2026 compared to the three months ended June 30, 2025... Gross margin decreased to 72% from 75%, for the three and six months ended June 30, 2026, compared to the three and six months ended June 30, 2025. The dec
- **[METRIC] Net Retention and Module Attach** (NEGATIVE, Risk: HIGH): Customer retention remains a key risk despite strong reported expansion. Enterprise contracts generally do not automatically renew, while pay-as-you-go customers can cancel or downgrade with little notice. A few large customers reducing usage could materially affect results. [DEMAND]
  > Our contracted customers... generally have no obligation to renew their subscriptions for our products after the expiration of their contractual period... pay-as-you-go customers... can terminate their subscriptions, or switch to less expensive subscription plans, at will with little advance notice.
- **[PRINCIPLE] Attack Surface Relevance** (NEUTRAL): STABLE: The filing continues to identify limited redundancy at the Portland core facility and only partial redundancy from Amsterdam. It also documents prior power failures at Portland in November 2023 and March 2024, plus the possibility that automation failures could affect most facilities simultaneously. No new outage or deterioration was reported in Q2 FY26, so the risk remains high but unchanged. (1 stable)
  > The failure of any of our core co-location facilities for any significant period of time, particularly our U.S. core co-location facility, could place a significant strain upon the ongoing operation of our business, as we have only limited redundant functionality for these facilities.
- **[PRINCIPLE] Channel and MSSP Leverage** (NEUTRAL, Risk: MODERATE): Channel partners are becoming more important, but this can weaken visibility into direct demand and expose Cloudflare to partner termination, pricing pressure, support failures, and competitive conflicts. Channel revenue rose materially as a share of total revenue. [CONCENTRATION]
  > Channel partners $217,653 31%... Direct customers $478,408 69%... Channel partners $130,415 25%... Direct customers $381,901 75%.
- **[PRINCIPLE] Hardware-Software Mix** (NEGATIVE, Risk: HIGH): The risk remains HIGH and is worsening in financial significance. Network servers increased from $488.8 million to $672.9 million of gross equipment during the year, while capital expenditures more than doubled to $230.4 million for the first nine months. The company also disclosed exposure to tariffs, component shortages, delivery delays, and reliance on a limited number of server suppliers without long-term supply guarantees. (3 intensifying, 2 stable, 1 high-severity)
  > We expect significant component shortages that may impact our server supply chain during the current year, particularly in memory products such as Dual In-line Memory Modules (DIMMs), as well as enterprise Solid State Drives (SSDs), Central Processing Units (CPUs), and high-capacity Hard Disk Drives
- **[TREND] Cyber Disclosure Regulation** (NEGATIVE, Risk: HIGH): The risk is HIGH and remains actively present. The company disclosed a new August 2025 breach of a third-party chat agent that exposed some customer contact and support information. This adds to the previously disclosed 2023 nation-state intrusion and identity-vendor incidents. Although management says there was no material financial impact from these incidents, the repeated nature of vendor-related compromises increases exposure to future SEC reporting, regulator inquiries, litigation, customer credits, and remediation costs. (3 intensifying, 1 emerging, 1 stable, 1 high-severity)
  > For example, in November 2023, we detected that a likely nation-state threat actor had gained unauthorized access to one of our internal systems... Further, in August 2025, a breach of a third-party chat agent integrated with our customer relationship management system allowed threat actors to gain 
- **[TREND] Vendor Rationalization** (NEGATIVE, Risk: HIGH): Competition from public cloud providers, telecommunications companies, security vendors, AI companies, and lower-priced bundled offerings could reduce Cloudflare's market share, pricing power, revenue growth, and gross margin. [COMPETITIVE]
  > Many of our larger competitors have substantially broader and more diverse product and services offerings, which may allow them to leverage existing commercial relationships, incorporate functionality into existing products, sell products and services with which we compete at zero or negative margin

### Scenario Analysis

- Cloudflare's core business is cybersecurity and network infrastructure delivered through a distributed cloud platform, rather than manufacturing, traded goods, logistics, or industrial capex. Tariffs and reshoring could indirectly influence customers' IT spending, data-sovereignty requirements, or network-security needs, and Cloudflare may incur some equipment and data-center input costs, but the evidence does not show direct exposure to tariffed products, domestic manufacturing incentives, supply-chain localization, or reshoring capex. Therefore, the scenario is only weakly and indirectly relevant to Cloudflare's core business. (NEUTRAL)
- The primary first-order effects are changes in corporate financing conditions, customer budgets, Treasury yields, and supplier costs rather than mortgage, banking, consumer-credit, or CRE channels. If rates remain high, smaller customers may delay purchases, downgrade or churn, sales cycles may lengthen, and infrastructure costs may pressure gross margins; if rates fall, technology and AI spending can improve, but interest income on Cloudflare's large securities portfolio will eventually decline. Enterprise contracts and substantial remaining performance obligations delay the revenue impact, although usage-linked costs can weaken cash generation and margins before reported revenue adjusts. At the third order, lower discount rates could materially lift the valuation of this loss-making, high-growth company and improve its acquisition opportunities, while persistent high yields could trigger multiple compression even if operating growth remains strong. (POSITIVE)
  > To the extent challenging macroeconomic conditions persist, we may experience ... increased costs for employee compensation and equipment purchases resulting from continued inflationary cost pressures.
- AI adoption should increase traffic from agents, APIs, inference services, and AI-enabled applications, supporting Cloudflare's security, performance, connectivity, developer-platform, and AI-governance products. That revenue opportunity carries second-order costs: scarce CPUs, memory, SSDs, storage, servers, bandwidth, co-location, and depreciation are already contributing to higher cost of revenue and lower gross margins. Cloudflare's global network, ISP relationships, and peering can improve utilization and partially offset unit costs, but its distributed footprint also requires continuous capital spending across many facilities and interconnections. In the third order, the company could benefit as enterprises seek a neutral security and control layer across multiple AI providers, but it could lose strategic leverage if hyperscalers bundle cloud, model access, networking, and security or if chatbot usage reduces traditional website traffic. (POSITIVE)
  > For example, we expect significant component shortages that may impact our server supply chain during the current year, particularly in memory products such as Dual In-line Memory Modules (DIMMs), as well as enterprise Solid State Drives (SSDs), Central Processing Units (CPUs), and high-capacity Har

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