Cloudflare shares drop 15% as AI hype meets slowing growth and 20% layoffs
TL;DR:
- Cloudflare shares fell more than 15% in premarket trading on Friday after a second-quarter revenue forecast that disappointed investors who had bet the company would be one of the clearest AI infrastructure beneficiaries.
- The networking and cybersecurity provider also said it would lay off about 20% of staff, citing greater use of AI tools — a move Jefferies warned could hurt near-term growth.
- Resultsense view: Cloudflare is the first widely-followed name to combine the “AI is squeezing our infrastructure margins” story with the “AI is now letting us cut our headcount” story in the same earnings release, and the market reaction is a useful real-time read on how investors are pricing both claims.
The reaction is striking because Cloudflare had rallied 43% since its February results on the AI-beneficiary thesis, leaving the bar for this quarter unusually high. Cloudflare said it expects revenue to rise up to about 30% in the second quarter — slower than the 33.5% growth recorded in the first quarter — and adjusted gross margins shrank to a record low of 72.8% from 77.1% a year ago.
The margin compression story
The earnings statement frames a single dynamic: AI infrastructure costs are rising fast enough to compress gross margin even as AI use cases drive top-line growth. “To protect its profitability, the firm is trading higher infrastructure costs and depreciation for salaries,” Morningstar senior equity analyst Malik Ahmed Khan told Reuters. In other words, Cloudflare is using AI tools to take labour cost out of the operating line because hardware cost is rising in the cost of goods sold line.
The 20% headcount reduction lands Cloudflare with companies like Jack Dorsey’s Block, which has said AI could change how work is done by automating tasks such as coding. OpenAI chief executive Sam Altman and others have warned this category of announcement sometimes labels cuts companies would have made anyway, but the market took Cloudflare’s specific attribution at face value enough to mark the stock down sharply.
Where the analysts still see upside
Despite the share drop, analysts were broadly positive after results that included better-than-expected quarterly sales and a raised annual revenue forecast. About four brokerages raised their price targets, taking the median to $243. Cloudflare’s services have been highlighted as crucial for users of autonomous AI agents — the report names the autonomous agent Openclaw as an example, a use case that fits the company’s CDN-and-security positioning.
The valuation question remains live. Cloudflare’s 12-month forward price-to-earnings ratio of 198.93 is more than twice CrowdStrike’s 95.57 and roughly four times Palo Alto Networks’ 50.13.
UK relevance
Cloudflare matters to UK businesses well beyond its share price. Many UK websites, SaaS products and security workflows sit on Cloudflare’s network, and any sustained margin pressure on the company is likely to translate over time into pricing changes or feature-tier reshaping. UK firms running heavy AI agent traffic — already growing with the rise of agent-based workflows — should expect their Cloudflare costs to scale less predictably than traditional traffic patterns.
Looking forward
The headline read for UK investors and AI buyers is that the “rising tide lifts all AI infra boats” thesis is being repriced one company at a time. Watch for whether other AI-adjacent infrastructure names — particularly those carrying multi-100× forward P/E ratios — repeat Cloudflare’s margin-compression message in upcoming results.