Key Takeaways
- Cloudflare’s third-quarter revenue rose 39% to $782.5 million, its fastest growth in nearly four years and $46 million above its own guidance midpoint.
- Management guided fourth-quarter revenue to $845 million to $846 million and expects a GAAP profit in that quarter, well ahead of its 2028 target.
- Growth is getting more expensive: cost of revenue jumped 54%, and GAAP gross margin fell to 71.2% from 74.0%.
- The fourth-quarter report, expected in February, will show whether the GAAP profit lands and gross margin stops sliding.
Cloudflare (NET) just posted its best quarter ever, and it landed in an ugly week for AI stocks. Cloudflare said on November 5 that third-quarter revenue rose 39% to $782.5 million.
That result gives investors a fresh comparison with Datadog (DDOG), a close software peer that reported a day earlier. In the second quarter, both companies grew revenue 36%, although Datadog did it on $1.12 billion of sales.
Cloudflare shares rallied after the report anyway. The wider AI trade had sold off on fears of tougher data center rules after Democrats swept the midterms. On Monday, Morgan Stanley and UBS called that rout overdone, and Wall Street bounced.
The harder question sits under the beat. Growth is speeding up, but it is eating into gross margin.
A quarter well above plan
Cloudflare guided to $736 million to $737 million back in August. It beat that midpoint by $46 million.
A few numbers stood out:
- Revenue growth reached 39%, its fastest in nearly four years, up from 36% in the second quarter and 34% in the first.
- Non-GAAP operating margin climbed to 17.5% from 15.3% a year earlier.
- Non-GAAP EPS rose to $0.38 from $0.27, and current RPO grew 37%.
CEO Matthew Prince sounded like a man who expects more. “Our engine is firing on all cylinders, and we’ve found an even higher gear for this next phase of growth,” he said in the earnings release.
Here is that acceleration, quarter by quarter…
Quarterly revenue is up from $562 million a year ago, which puts Cloudflare past a $3 billion annual run rate.
The outlook carries the story
The guidance mattered even more than the beat. Cloudflare expects fourth-quarter revenue of $845 million to $846 million, about 38% above last year’s $614.5 million.
Full-year guidance rose to $2.963 billion to $2.964 billion, from $2.864 billion to $2.870 billion in August. That implies roughly 37% growth for 2026, while adjusted EPS guidance moved up to $1.35.
Management also said on the earnings call that it expects a GAAP profit in the fourth quarter. Its investor day had set 2028 as the target.
That would be a sharp turn. Cloudflare lost $34.1 million under GAAP in the third quarter, compared with a $1.3 million loss a year ago. Stock compensation of $174.1 million drove most of the gap.
Restructuring has weighed on results too, because the shift to an agentic AI-first operating model has cost $161.7 million in charges this year. Only $11.0 million of that landed in the third quarter, so the heaviest charges are already behind it.
Can one quarter really close that gap?
Fourth-quarter guidance implies a non-GAAP operating margin near 18.5%, so the underlying business keeps getting more profitable.
TIKR tracks 34 analysts on Cloudflare. How many say “Buy”?
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The network bill keeps rising
Gross margin is where growth gets expensive. Cost of revenue jumped 54% in the quarter, and GAAP gross margin fell to 71.2% from 74.0%.
Spending on property and equipment also rose 44% to $121.8 million. As a result, free cash flow margin slipped to 10% from 13%, even though free cash flow grew to $82.1 million.
Against a close peer, the slide looks like this:
Cloudflare’s non-GAAP gross margin was 72.4% in the third quarter, down from 75.3% a year earlier.
The balance sheet buys time. Cloudflare ended September with $5.13 billion in cash and securities against $4.44 billion of convertible notes.
My take: This quarter was strong, and the raised outlook suggests it was no one-off. Still, I’d want gross margin to stabilize before chasing the rebound. AI traffic is clearly lifting demand, yet it is also lifting the server and co-location bill. If Cloudflare books a GAAP profit while gross margin holds near 71%, the bull case gets much cleaner.
The fourth-quarter report, expected in February, is the next test. It will show whether that GAAP profit arrives and whether gross margin finally stops falling.
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Disclaimer:
Please note that the articles on TIKR are not intended to serve as investment or financial advice from TIKR or our content team, nor are they recommendations to buy or sell any stocks. We create our content based on TIKR Terminal’s investment data and analysts’ estimates. Our analysis might not include recent company news or important updates. TIKR has no position in any stocks mentioned. Thank you for reading, and happy investing!
