Besides artificial intelligence (AI), cloud computing is arguably the biggest revolution in tech since the invention of the internet. Amazon Web Services (AWS), Microsoft Azure and Google Cloud dominate the market at present but there is a fourth company – Cloudflare – nipping at their heels.
It provides critical digital infrastructure for nearly a quarter of all internet traffic, said Ben James, an investment specialist at Baillie Gifford. “The company focuses on making the internet faster, more secure and more reliable for businesses of all sizes. It sees itself as the fabric that stitches all the different cloud computer providers together for its customers.”
Baillie Gifford holds Cloudflare within Scottish Mortgage, Monks and the Baillie Gifford US Growth trust, and is one of Cloudflare’s largest shareholders.
“What truly excites us about Cloudflare is its unique approach to solving complex internet challenges. While most companies view internet security as a cost centre, Cloudflare sees it as an opportunity for innovation,” James explained.
“Its differentiator is a global network that turns traditional cybersecurity on its head. Instead of building higher walls, it is fundamentally reimagining how digital infrastructure can work. Our conviction comes from its ability to solve problems other companies can't.”
Cloudflare’s network was built ‘at the edge’ (i.e. closer to the end user), which reduces latency (the time it takes data to pass from one point in a network to another) and improves performance and efficiency. “This isn't just an incremental improvement – it's a fundamental shift in how internet services can be delivered,” James said.
Its global network is present in 335 cities in more than 125 countries. “As more businesses globally digitise, Cloudflare's international network becomes increasingly valuable, offering seamless, secure digital experiences across different regions and technological environments,” he noted.
Furthermore, Cloudflare's Workers AI platform is positioning itself as a critical solution for deploying AI applications and here its flexible, low-cost distributed network has an innate advantage, he continued.
The company’s approach to cyber security also stands out ahead of the competition. “As cyber threats become more sophisticated, Cloudflare's holistic approach to security – protecting not just against attacks but improving overall digital performance – gives it a significant competitive advantage,” he said.
Cloudflare’s efficiency is illustrated by server capacity utilisation rates: 5-10% for on premise, 30% for other cloud providers and 50-65% for Cloudflare.
Julian Wheeler, a partner at Shard Capital, said: “If Cloudflare is the most efficient, it will ultimately be the low-cost provider of cloud computing.”
The three main cloud providers made $240bn in revenue in 2023 but they estimate the market is only 15% penetrated, so cloud computing could become a $1.6trn industry, he said, making this a huge opportunity for the company.
Wheeler first presented the stock to Shard Capital’s investment committee in October when it was $80 per share. The share price has more than doubled since then; it hit $176.50 before the market opened on 14 February, having “roofed it” after Cloudflare’s results on 6 February. The company’s market capitalisation has grown from $29bn in October to over $50bn today, he added.
During the results announcement, Cloudflare revealed a one-year $13.5m deal with a leading AI company that is already an existing customer. Wheeler thinks the client, whose name was not disclosed, could be OpenAI. “When the largest, most exciting company in the AI space is putting itself on Cloudflare, that’s a clue this is the right company,” he noted.
Cloudflare also said it has 173 customers paying more than $1m, having added 55 of them in 2024. More than half of those new customers were acquired during the fourth quarter. Cloudflare’s clients include Walmart’s entire e-commerce business, Uber, Shopify, Crowdstrike and several US government departments.
Other recent developments include a partnership with Adobe to ascertain the provenance of any online image, enabling users to find the original image and detect fakes.
Another new service allows businesses to prevent AI chatbots from scraping data from their websites or charging them for access.
Yet despite its significant potential, Cloudflare has disappointed investors before. Its share price shot up in 2021 amidst lockdown-era enthusiasm for tech stocks, peaking around $211 on 19 November 2021 before dropping sharply back during the 2022 tech bear market and hitting $41 on 17 June 2022.
Performance of Cloudflare over 5yrs
Source: Google Finance
Wheeler does not think there will be another ‘buy on the dip’ opportunity, however, given Cloudflare’s impressive results and market-leading technology. “Tell me if you ever find a cheap Ferrari – you won’t, they don’t exist,” he said.
Another factor propping up the share price is the concentrated shareholder register; the six largest shareholders, including Baillie Gifford, Capital Group and Vanguard, own half the stock.
This means as Cloudflare’s technological prowess becomes more widely known and other investors want to pile in the share price is likely to be pushed up faster than might otherwise be the case, Wheeler argued.