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Today's Observation

Amid a large-scale sell-off of AI and technology stocks, Cloudflare delivered a quarterly earnings report that significantly exceeded market expectations. On November 5, the U.S. technology sector suffered a broad decline, with the S&P 500 index falling 4.4%, the Nasdaq index dropping 5.5%, Nvidia down 9.3%, and AMD down 17.3%. Cloudflare also experienced a decline of about 8.3% during regular trading hours, but after the earnings report was released, the stock price soared about 17% in after-hours trading, effectively recovering most of the day's losses and turning it into a relative increase compared to the previous day's close.

The core support for the stock price's rebound is not just that revenue and profits exceeded expectations, but that Cloudflare's growth has accelerated again. In the third quarter of FY2026, Cloudflare’s revenue reached $782.5 million, a year-on-year increase of 39%, exceeding market expectations of about $736.8 million and marking the fastest growth rate in nearly four years. The adjusted EPS was $0.38, higher than the market expectation of $0.34; the remaining performance obligations grew 37% year-on-year, indicating that signed contracts are expected to drive revenue confirmation at a sustained pace over the next 12 months.

Moreover, the company expects fourth-quarter revenue to reach between $845 million and $846 million, with a median of $845.5 million, significantly higher than the market expectation of about $798.2 million. The full-year revenue guidance was also raised from the previous range of $2.864 billion to $2.870 billion, to $2.963 billion to $2.964 billion. On the same day that the market aggressively sold off AI infrastructure companies, Cloudflare's post-market rebound indicates that investors do not dismiss all AI-related companies, but rather place more emphasis on the speed of revenue realization, order visibility, and capital efficiency.

Data in a Minute

• FY2026 Q3 revenue of $782.5 million, a year-on-year increase of 39%, exceeding market expectations of about $736.8 million;

• This quarter’s revenue growth rate increased further from 36% in the second quarter to 39%, the fastest rate in nearly four years;

• Adjusted EPS of $0.38, exceeding market expectations of $0.34;

• Adjusted net profit of $143.7 million, compared to $102.6 million in the same period last year;

• Adjusted operating profit of $137.1 million, compared to $85.9 million in the same period last year;

• Adjusted operating profit margin of 17.5%, compared to 15.3% in the same period last year;

• Current remaining performance obligations (cRPO) grew 37% year-on-year;

• Operating cash flow of $215.4 million, compared to $167.1 million in the same period last year;

• Free cash flow of $82.1 million, compared to $75 million in the same period last year;

• Free cash flow margin of 10%, compared to 13% in the same period last year;

• GAAP net loss of $34.1 million, compared to a net loss of $1.3 million in the same period last year;

• GAAP operating loss of $67.9 million, compared to a loss of $37.5 million in the same period last year;

• Adjusted gross margin of 72.4%, compared to 75.3% in the same period last year;

• Cash, cash equivalents, and available-for-sale securities at the end of the quarter totaled about $5.129 billion;

• Q4 revenue guidance of $845 million to $846 million, higher than market expectations of about $798.2 million;

• Q4 adjusted EPS guidance of $0.43;

• FY2026 revenue guidance raised to $2.963 billion to $2.964 billion, with market expectations of about $2.870 billion;

• FY2026 adjusted EPS guidance raised to $1.35;

• Cloudflare dropped about 8.3% during regular trading hours, but surged about 17% in after-hours trading after the earnings report was released.

MSX View

The most important reason for Cloudflare’s after-hours rebound is that it simultaneously met the three conditions of “exceeding performance expectations, accelerating growth, and raising guidance.” For high-valuation software companies, simply exceeding quarterly market expectations is usually not enough to drive stock prices up. Investors are more concerned about whether the company can maintain its growth rate and whether the next quarter's guidance supports existing valuations.

Cloudflare's third-quarter revenue grew 39% year-on-year, not only exceeding market expectations but also faster than the 36% in the second quarter. The company expects the median fourth-quarter revenue to reach $845.5 million, nearly 6% higher than previous market expectations. This implies that the growth this quarter is not just a one-time early revenue recognition, and management expects this momentum to last at least until the end of the year.

The 37% year-on-year growth in cRPO is also significant. Revenue reflects confirmed business while cRPO reflects contracted revenue expected to be recognized in the next 12 months. The growth rates of both are quite close, indicating that Cloudflare's current growth is driven by both current usage and supported by certain orders.

Cloudflare is benefiting from three types of demand simultaneously. The first is cybersecurity. As the scale of cyber attacks expands, enterprises still need DDoS protection, application security, zero-trust access, and network performance services. Security spending generally has a higher priority than typical IT projects, which allows Cloudflare to maintain some resilience even when companies cut back on software budgets.

The second is developer platforms. Workers allow developers to run applications and code directly on Cloudflare’s global network. As AI applications require lower latency and closer processing and data capabilities to users, Cloudflare has the opportunity to expand from traditional content delivery networks to application development and operation platforms.

The third is AI traffic infrastructure. AI agents generate a substantial number of programmatic requests and create demands for authentication, security protection, and content authorization. Cloudflare does not need to undertake server and chip procurement on the same scale as GPU cloud companies but can generate revenue from the growth of AI traffic through its network, security, and development tools.

This is also the distinction between Cloudflare and some of the AI infrastructure companies experiencing concentrated sell-offs in this round. The market currently worries about high capital expenditures on data centers, rising financing costs, and local governments potentially restricting the construction of new data centers. If the expansion of computing power supply slows, GPU, server, power, and data center construction companies will be the first to be affected. While Cloudflare also needs to build a global network, its business model is closer to network, security, and development platform, and revenue growth does not entirely depend on new large data center projects.

However, this earnings report does have aspects that need to be observed. The adjusted gross margin fell from 75.3% to 72.4%, and the free cash flow margin also decreased from 13% to 10%. This indicates that while Cloudflare expands its network capacity, supports more computing loads, and explores new products, infrastructure and operational investments are still increasing.

The company achieved an operating profit of $137.1 million under adjusted terms, but still recorded an operating loss of $67.9 million under GAAP terms; the GAAP net loss also widened from $1.3 million in the same period last year to $34.1 million. The improvement in adjusted profit margins indicates that operational leverage is forming, but there is still a distance before achieving stable profitability under GAAP standards. Therefore, Cloudflare's current investment logic is not solely relying on the AI concept, but also needs to prove that AI traffic can bring faster revenue growth without significantly eroding gross margins and cash flow.

This after-hours rebound indicates that amidst the overall reduction of AI asset valuations in the market, capital is still willing to reward companies that can realize revenue, raise guidance, and generate positive free cash flow; the market has not given up on AI trading.

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