Disney reiterated 2025 guidance. It continues to expect high single-digit EPS growth, 10%+ entertainment EBIT growth, 13% sports EBIT growth and 7% experiences EBIT growth. It also reiterated its $15 billion operating cash flow (OCF) guidance. After the large profit beats, some wanted an annual guidance raise. Here’s what leadership had to say about that:

“The strong Q1 increases our level of confidence in the guide… We're certainly not afraid to over-deliver if the business momentum gives us that… it's just premature to be thinking about raising guidance, in my opinion, after just 1 quarter results.”

CFO Hugh Johnston

Disney trades for 20x forward EPS and 28x forward FCF. EPS is expected to grow by 10% this year and by 12% next year. FCF is expected to decline by 19% following 75% Y/Y growth and then grow by 25% the following year. EPS estimates should be safe. FCF estimates may fall a tad more.

Results Context:

Disney and Reliance Industries Limited (RIL) closed their transaction in November. This creates a joint venture combining Disney’s entertainment assets there (including Disney+ Hotstar) with RIL. Reliance owns 56% of the new entity, with Disney owning 37% and a private investor the remaining 7%. This had some significant impacts on the Entertainment and Sports segments this quarter. The transaction led to Disney’s India business generating $74 million in Entertainment EBIT vs. $254 million Y/Y and $9 million in sports EBIT vs. -$636 million Y/Y, thanks to things like fewer cricket rights for the quarter. Despite the EBIT headwind for Entertainment, the segment still generated nearly 100% Y/Y growth in profit. This is because of great content licensing success (thank you hit films) and streaming inflecting to positive EBIT Y/Y. Both of those buckets offset an 11% linear EBIT decline. Modest overall subscriber growth and higher subscriber fees both helped while foreign exchange hurt a bit.

The RIL deal is also why streaming advertising revenue actually fell by 2% Y/Y. When excluding this deal, ad growth was 16% Y/Y.

Next, note that Disney conducted sizable price hikes in the recent past for Disney+ and Hulu, which is why Disney+ subscribers fell slightly Q/Q. That’s expected to happen again this Q, as the price hikes finish working their way through the system. This also led to average revenue per user (ARPU) strength for the two products.

EBIT for domestic ESPN fell Y/Y due to more college football playoffs (CFP) and NFL playoff rights. This powered 9% Y/Y revenue growth and 15% advertising revenue growth alongside -9% Y/Y EBIT growth. Price hikes are also working their way through ESPN+, which led to -3% Y/Y subscriber growth and 7% average revenue per user (ARPU) growth. International ESPN EBIT benefited heavily from the RIL merger. Finally in sports, exiting its previously planned “Venu Sports” joint venture lowered segment EBIT by $50 million.

Streaming Progress & Growth:

Streaming continues to be a “success story” in the eyes of Disney leadership. Most of that progress can be seen in outperforming Y/Y EBIT growth, while leadership also hinted at current streaming guidance being conservative.

This success is not currently showing up in subscriber growth for Disney+ specifically, as again Disney is still dealing with higher churn related to large recent price hikes across the products. The company expects to grow overall streaming subscribers for the year, and Q1 outperformance increases its overall confidence in doing so.

Looking ahead, there are a few large pieces of Disney’s plans to drive durably profitable growth in streaming. First is on the product side. Whether it’s updating a rather stale home page, advancing content matching algorithms, building curated content playlists, operationalizing its paid sharing rollouts, conducting needed work on the international ad tier offering or creating more targeted, relevant ad experiences, there are many things to do here. Iger doesn’t see one project as the most important, but sees them all contributing to improving engagement and retention. It has made “significant progress” on this platform enhancement initiative but there’s still more work to do.

The other big piece of its plan is offering Hulu and its ESPN Flagship streaming product (coming this fall) right from within Disney+ (and as standalone products too). For Hulu, adding it to the Disney+ content library as an add-on directly drove engagement and made Disney+ the primary streaming product for 50%+ of bundlers. This “reaffirms the belief in the power and value of aggregating content and brands in one app.”

ESPN is still in its transition phase from linear-only to linear and direct-to-consumer (DTC). When that happens, the app will add features like betting, stats, fantasy sports and so much more to deepen engagement. For now, ESPN+ (and its far slimmer offering) remains the centerpiece of its sports streaming approach. Disney continues to gradually infuse new sports studio shows into the ESPN+ offering, with a new sports studio with a new SportsCenter show (SC+) exclusively aired there. SC+ is a baby step while ESPN Flagship is the major leap.

Management also addressed other competitors like Netflix entering the live sports fold:

“Other streamers are getting into sports. We have the advantage of not only an unmatched menu of sports & programming, but we're on 365 days a year, 24 hours a day. So if you're a sports fan, it's not about 1 boxing event or 1 day of football, it's about sports every single day of the year and every hour of the day.”

CEO Bob Iger

Linear Decay Process:

For the last few years, the permanent, inevitable decline of linear television has been a large headwind for Disney’s results. This year, streaming should greatly close the EBIT gap with linear, while also generating more than double the revenue that linear will. There’s a lot of leverage left to enjoy for that now larger revenue base.

Streaming’s EBIT progress has helped remove linear as a financial burden in the eyes of Iger. He thinks linear is now enhancing Disney’s overall go-to-market by serving as a top-of-funnel to entice people to eventually join a streaming service. He thinks linear is now “enhancing the overall television business,” as shows like Abbott Elementary see very different audiences between linear and DTC. It’s still more incremental than many think.

While streaming will be the future, Disney doesn’t want to force people to cut the cord before they’re ready. It wants consumers to be able to watch its content in whatever way they’d like to. Whether that’s a traditional linear bundle, emerging “skinny bundles” (more granular channel packages offered DTC) or watching through an app, it wants to be there. That’s why products like ESPN will continue to be offered via traditional outlets years after the app goes like this year.

Entertainment – FUBO, ESPN Flagship Venu & Skinny Bundles:

We got some more details on the Fubo venture, exiting Venu and the advance of skinny bundles. First, why Fubo? I spoke about it a bit here (section 3), and leadership added a bit more color. To Iger, this deal means Hulu’s Live TV business (which is what is merging with FUBO) will get the time and resources that it deserves to make it a best-in-class product. This is a non-core business for Disney overall and even Hulu specifically. Disney did not want to make it a major focus area, and this helps it prioritize. As long as they’re right to trust Fubo’s current leadership team, which will be highly influenced by Disney’s majority stake and board presence, I think this was a good decision.

Part of this arrangement entails Fubo creating another skinny bundle out of the overarching sports rights between the two companies. That will give ESPN yet another distribution outlet, along with other skinny bundles like the DirecTV My Sports package. These skinny bundles, to Iger, made Venu “redundant,” which is part of why the company backed out.

Content Success:

In films, Disney’s choice to “return creativity to the center of the company” is paying dividends. It was the first company to cross $5 billion in box office revenue since 2019 and delivered the top 3 films of the year; it has a large slate of titles including Zootopia 2 and Avatar 3 coming this year. Moana 2 crossed $1 billion in sales and helped make the original Moana the most streamed movie in the USA for the second straight year. A new Moana stage show was also made a central piece of the Treasure cruise ship entertainment repertoire. This just goes to show how powerful a hit film franchise can be for the rest of Disney’s business. In TV, Disney had the top 4 shows in the USA by hours streamed. Bluey… AKA ole reliable… took the top spot, with Grey’s Anatomy, Family Guy and Bob’s Burgers rounding out the top 4. ABC’s David Muir remained #1 in news for his 9th straight year.

Top 3 films and top 4 shows streamed. That’s pretty good… right? I include this to remind everyone that Disney still has a fortress of high-quality intellectual property. To me, this creates a highly compelling worst-case scenario for the streaming business. Either it continues to grow on its own, or realizes mega-cap tech names like Amazon, Apple, Alphabet and Netflix are too tough to outspend and outcompete. In that world, I think Disney could build a massively successful licensing business to keep its IP alive and well and its parks packed. Content is king… and the king provides insulation from being left behind as this industry rapidly evolves. I do think Disney+ will succeed alone and do think Disney is best-positioned out of legacy media to keep winning. But I also love a compelling plan B.

Experiences:

There’s a lot of skepticism surrounding Disney’s ability to reach its 7% EBIT growth target for this segment in 2025. Flat growth in Q1 and a reliance on back-half-weighted revenue have a lot to do with that, but again, that flat growth was related to hurricanes and pre-opening costs. Guest spending levels continue to grow and traffic was just fine when excluding extreme weather. Regardless, EBIT outperformed management’s internal expectations. To CFO Hugh Johnston, Q1 made them more confident in this 7% goal being comfortably attainable. Confidence is also coming from strong bookings trends that persisted throughout the quarter and a “spectacular” launch for its new Disney Treasure cruise ship. Rooms are selling out and this product will be profitable on a non-GAAP basis immediately.

“Overall, our level of confidence in the Experiences guide is high.”

CFO Hugh Johnston

NBA Ratings Weakness:

They were asked about ratings declines in the NBA as its content fees rise and it’s locked in for 11 years. They’re not concerned and view it as a “marquee part of ESPN’s offering.” They sort of need to say this after committing so much money, but still good to hear.

Another rock-solid quarter for Disney. Iger has clearly gotten this company on the right track and I think guidance for the year will eventually be raised, likely next quarter. Disney’s streaming business has obviously turned a corner while product enhancements, bundling and hit films should all help deliver slow and steady subscriber growth over the coming years. I do not think paid password sharing will provide the kind of aggressive acceleration in subscriber growth that Netflix enjoyed, as that product is higher-quality today than Disney+, but I do still think that will help. Streaming is rapidly turning into a formidable EBIT replacement for linear’s permanent decline, and I would argue the ceiling for streaming is higher, given the inherently more precise advertising processes it supports vs. cable.

Disney’s experiences business dealt with headwinds better than it was supported to and the sports business is poised to launch its ESPN Flagship streaming service this fall. The valuation is reasonable, the execution is brightening and I continue to be a confident shareholder for now. I personally like the idea of having a boring blue-chip company in the portfolio like this one.

Q1 revenue and EBIT guidance missed by 3% and 12%, respectively. This includes an added $2.1 billion in FX impacts, which is larger than expected. The revenue miss would have been about 2% and the EBIT miss would have been smaller without this abnormal obstacle. It also reminded us that it’s lapping leap year, but that was surely already baked into estimates. On EBIT, it reduced the useful life of some servers while elongating the useful life of some heavy machinery. Netting this out, it expects a $400 million headwind to EBIT from this in 2025.

For 2025, it guided to roughly $104 billion in CapEx, with the $26 billion in Q4 CapEx expected to be stable all year. While that number is massive, commentary throughout the next section will spell out why I’m entirely ok with it and why I think it should mean continued AWS strength throughout 2025.

Amazon trades for 38× 2025 GAAP EPS estimates. The large Q4 EPS beat paired with the Q1 EBIT miss should lead to some modest downward revisions for 2025 profit assumptions, so lets call it 40× 2025 EPS estimates. EPS is expected to compound at a 22% clip for the next two years.

AWS – GenAI Models & Infrastructure:

Amazon launched its new family of foundational models (FMs) called Nova. While this doesn’t lead the industry across all relevant benchmarks, it does rank well in intelligence. More importantly, it really stands out in cost and efficiency. It offers lower price and latency, along with key Bedrock tools such as model distillation to make training and inference all the more efficient. Specifically, customers enjoy 75% lower apples-to-apples pricing by using Nova vs. other models on AWS. This already has “thousands of customers,” including Palantir, Robinhood, SAP, Deloitte and many more.

The company also launched its Trainium2 chip and Elastic Compute Cloud (EC2) instances (or virtual machines) that run on these new processors. Trainium2 drives about 35% better price performance vs. the predecessor and will be used to power “Project Rainier” — a collaboration between Amazon and Anthropic to build the world’s largest compute cluster. The chip is also being used by Databricks and Adobe.

Trainium2 enables something called “UltraServers.” In essence, this facilitates a connection of up to four Trainium2-powered servers to create larger, denser compute clusters for faster training/inference and more complex work. Trainium3 will be previewed later this year.

GenAI Model Configuration and Apps:

Bedrock added prompt caching, intelligent prompt routing and model distillation tools this quarter. Prompt caching allows Bedrock to store previous queries and model outputs to quickly recycle redundant prompts in real time and save customers money. This also improves model performance considerably. Intelligent prompt routing automates the matching of input tokens (what you plug into the model) with the very best product for that specific thing. This is where Bedrock’s pursuit of world-class model choice really shines. It does have its own Nova FMs, but it really wants to just give developers all of the options they could possibly want to inspire them to process data and build apps through AWS (and so Amazon can build its own great apps too). Lastly, model distillation takes large models and shrinks them by enabling smaller models to effectively learn from parent products. This creates more performance efficiency. Distillation is one of the techniques DeepSeek executed quite well to improve model training. It’s happy with DeepSeek’s advancement, as it’s adamant that lower costs will drive exponential usage growth.

While that idea is somewhat intuitive, it’s also important in the wake of the DeepSeek breakthrough. That company has created newfound concern over cheaper model training and inference leading to less demand for Amazon’s infrastructure. As I said last week and as Jassy said tonight… not so fast, my friend. As Jassy explained, all of the model builders are working on the same things and learning from each other. He anticipates a “ton of leap frogging” in the coming years as competitors routinely copy each other’s work. That’s how technological revolutions generally go and this will be similar. Just like AWS driving mass compute and storage deflation led to decades of elite compounding for that business, he is excited for model training cost deflation to do the exact same thing. Lower costs to build models will simply mean more budget to build complex apps that were once considered irrational to pursue. It will mean the same explosion in data processing and compute demand as before…. just with better end products and faster innovation. As long as those end products are commonly built on AWS, Amazon will win.

“Sometimes people make the assumptions that if you're able to decrease the cost of any type of technology component, in this case inference, that somehow it's gonna lead to less total spend on technology. And we just we have never seen that to be the case. You know, we did the same thing in the cloud where we launched AWS. People thought that companies would spend a lot less money on infrastructure technology [because of cost deflation]. And what happens is companies will spend a lot less per unit of infrastructure… but then they get excited about what else they can build that they always thought was cost prohibitive. They usually end up spending a lot more in total.”

CEO Andy Jassy

As a relevant aside, Amazon is also adamant that GenAI apps will all use multiple models, which is another reason why model choice is so important and why Amazon immediately added DeepSeek to Bedrock and SageMaker.

This quarter, Amazon also launched the next iteration of SageMaker. As a reminder, “Hyperpod” (part of SageMaker) optimally distributes workloads across AWS’s wide range of diverse compute capacity and cuts model training cost by 40%. It allows companies to prioritize which workloads are most vital to allocate compute to as budgets are reached. It also gives seamless model-building checkpoints to allow developers to save their work and go back to it if they mess something up. This launch is going well.

For review, Amazon Q is an AI assistant for AWS that Jassy calls “the most capable for software development and leveraging your own data.” Amazon Q Transform is a product specifically for modernizing applications running on archaic mainframes. Last quarter, Amazon talked about using this to save $260 million and 4,500 developer years as it migrated 30,000 apps. Companies “asked for more” here, and so Amazon added Q transformation for windows.net apps to Linux and VMWare apps to EC2. This should accelerate app modernization by shrinking mainframe migration time by 50%.

“This is a big deal and these transformations are good examples of practical AI.”

CEO Andy Jassy

More on AWS:

AWS remains capacity constrained at a chip and energy level. This slowed down growth in Q4 and that will again happen next quarter. Just like for Alphabet (Azure had an execution misstep in addition to constraints), the tiny miss was not related to demand levels in the least. And this is why the CapEx guide for 2025 is so massive. As Jassy reminded us, strong demand signals mean AWS must spend more on CapEx to ensure it has the capacity in place to support that business in a timely fashion. Not spending enough means it will leave more demand on the table like it did this quarter.

It is spending a boatload on 2025 CapEx BECAUSE the demand environment supports that spend and BECAUSE it sees tangible revenue opportunities to harvest. I would much rather have them use their fortress balance sheet, lean into CapEx, fortify the infrastructure moat and harvest more demand over optimizing for CapEx today. Amazon expects these investments to resolve the supply bottleneck by the end of 2025.

“We don't procure it unless we see significant signals of demand. And so when AWS is expanding its CapEx, particularly in what we think is one of these once-in-a-lifetime type of business opportunities... I think it's actually quite a good sign.

CEO Andy Jassy

“It's hard to overstate how optimistic we are about what lies ahead for AWS.”

CEO Andy Jassy

Faster & Increasingly Efficient Delivery:

The wonderful thing about Amazon’s fulfillment business is that faster delivery doesn’t just mean directly higher conversion, but lower input costs too. Its last-mile fulfillment network is its very best logistics product for all 3 of those key performance indicators (KPIs), which is why Amazon has built this footprint out so aggressively over the last few years (+60% Y/Y). It’s also a key factor in Amazon delivering 65% Y/Y growth in goods delivered same day or overnight.

As leadership told us, this is a big piece of it enjoying more reductions in per-unit transportation and a 2nd straight year of overall lower cost to serve. The other big factor contributing to this success is its work to localize its overarching outbound fulfillment network. This makes sure goods are closer to their final destination.

While both of these initiatives have worked quite well thus far, Amazon has a ton of work left to do and thinks more cost-to-serve reductions will directly follow. In 2025, focus will shift from outbound fulfillment optimization to inbound fulfillment optimization. Thanks to revamped inventory forecasting algorithms, this will ensure Amazon receives and handles goods in the optimal facility. The algorithms have already helped improve forecasting and regional supply needs by 10% and 20%, respectively. They have also boosted % of goods sent to the “ideal building” by 40%. That’s notable, as it generally takes Amazon a while to tinker with these new processes to maximize their potential. The immediate impacts will only rise from here.

The other big focus area will be on robotics. There were understandably some questions here after Amazon debuted its latest batch of fulfillment robotics products in its Shreveport, Louisiana facility. Jassy told investors that he’s “very encouraged by what they’re seeing in terms of speed, cost and productivity improvements.” Early success will mean these products soon expand to new facilities, and Amazon has miles of work left to do in this field.

Relatedly, faster and cheaper service doesn’t just mean higher shopper conversion rates and margin. All of Amazon’s cost and speed progress means that it can rapidly, rationally and profitably ship more goods that were historically unattractive to carry. That effectively unlocks the massive everyday essentials category for Amazon, where it’s enjoying continued strong growth. If I know I can get that toothbrush tonight instead of in 48 hours, that probably makes me a lot more likely to buy it from Amazon than the other guy. Its Prime Air project (same-hour drone delivery) should augment this momentum.

In summary, all of these factors have dramatically helped Amazon improve its overall margin profile over the last few years. And? Many of them still have plenty of contribution left in the tank. With Amazon’s massive, growing base of revenue and nearly-endless roster of potential profit levers to pull, my confidence in this firm’s sustainably impressive profit growth is high.

Affordability:

To hammer home its push to control consumer price inflation, it debuted Amazon Haul during the quarter. This is its ultra low-price marketplace meant to compete with Temu and Shein. Along similar lines, Profitero named Amazon the lowest-priced U.S. retailer for the 8th straight year. It has an average 14% lead over the competition, and Haul should help to grow that even more.

Advertising:

Most of Amazon’s ad revenue continues to come from sponsored listings. That runway remains long, but it’s also hard at work with Amazon Prime Video placement formats. It added “full funnel” marketing campaigns for merchants, to help them move from building brand awareness, to key word and audience targeting all the way to their store page to drive sales. Amazon’s ability to connect ad dollars to revenue from one single ecosystem is simply unmatched. It also added a new “multi-touch attribution model to understand exactly how well every single piece of a multi-faceted campaign is performing… and to adjust where need be.

More:

This quarter was nearly identical to Alphabet and Microsoft. All 3 are dealing with capacity constraints, and Amazon specifically also dealt with soaring, wildly optimistic sell-side expectations for the quarter. That and some incremental FX challenges led to the guidance miss. While that’s never ideal, I’m not fretting. Amazon remains the market leader in two of the best secular growth stories in human history and boasts as much optionality and margin control as any elite company does. From Ads to streaming to processors to satellites to healthcare and more… the opportunities are endless and consumers are hooked on its uber-sticky subscription (myself included). The probability of this profitably compounding for a long time is exceedingly high, and some modest disappointment in this quarter does absolutely nothing to make me less bullish on this name. Amazing quarter? No. Thesis intact? Entirely.

I have not yet gotten to the Q&A of this report (only the prepared remarks and other materials). I will read that tomorrow and include it in Saturday’s article. For now, here’s the rest.

Cloudflare makes the internet fast and secure. They have a massive global Content Delivery Network (CDN) to move traffic closer to the end user. In turn, this cuts web latency. They actively assist clients in optimizing traffic, speed and consistency as well. It also has a suite of security tools to protect customers from Distributed Denial of Service (DDoS) attacks. This form of hacking aims to inundate and overwhelm networks with traffic. 

NET doesn’t sell physical firewall hardware, but instead a virtual, cloud-native “Magic Firewall” to supplant these hardware needs. It also offers web application firewalls for app-level security, while Magic Firewall is for network-level security. Magic WAN is Magic Firewall’s partner in crime. Magic WAN connects networks while Magic Firewall protects them. The closest cybersecurity competitor in public markets is Zscaler. Palo Alto is another.

A Few Key Products to Know Aside from Those Already Mentioned:

More Products:

Cloudflare Access is its Zero Trust Network Access (ZTNA) program. This directly competes with Zscaler. Zero trust means that a user or device must be constantly verified (or never trusted). Cloudflare does this in a seamless manner so as to minimize user friction. It considers device type, location, usage patterns (or signatures) and other contextual clues to better authorize permission requests. This way, it knows when to block those requests or when to require more information. It then deploys a minimal privilege approach to ensure only the necessary permissions are granted to workers. Nothing more, nothing less. Zero Trust ensures an adversary can’t breach the most vulnerable part of a tech stack and move freely throughout it thereafter.

Secure Access Service Edge (SASE) platform is a term for how Cloudflare conjoins web performance and security use cases. This drives vendor consolidation, controls costs and augments performance. Cloudflare One is its overarching product bundle subscription combining its suite.

Cloud Access Security Broker (CASB) is a security tool to provide firms with a birds-eye-view of application usage. It hosts and secures client data and uncovers suspicious activity or deviations in typical usage patterns to flag threats. It plugs into NET’s Secure Web Gateway (SWG), which is essentially a digital security guard ensuring protection from a firm’s secure network and assets and the open internet. It ties closely to NET’s data loss prevention (DLP) tool and URL filtering tool.

Browser Isolation is Net’s managed service for providing users with a purely secluded environment to search and scrape the web. This will be an increasingly important tool for its GenAI inference products that are now building steam. That’s where Cloudflare expects to realize the bulk of GenAI’s potential financial value. Models are trained once and periodically updated with new data. After that, the value of those models lies in their ability to connect dots and drive insights (or inferences). That’s where Cloudflare presides. It provides a managed cloud platform to do all of that app and model work in a secure and compliant fashion.

Cloudflare beat revenue estimates by 1.7% and beat its guidance by 1.9%. Remaining performance obligations (RPO) rose by 36% Y/Y to point to strong future demand.

The company continued to model variable revenue (pool of funds contracts) very conservatively as it’s a new stream of revenue for it. This was its way of saying guidance is overly conservative and they’re gearing up to beat.

Cloudflare trades for 188x forward EPS and likely closer to 200x following modest negative EPS revisions. EPS is expected to compound at a 21% clip for the next two years. It also trades for about 220x 2025 FCF estimates. FCF is expected to compound at a 44% clip for the next two years. Very expensive.

Go-to-Market: 

As it has been for the last few quarters, go-to-market was the main theme of the prepared remarks. It has been a little over a year since Founder/CEO Mathew Prince tore into his sales team and overhauled its go-to-market. He brought over Mark Anderson from Alteryx as the new company President and Chief Revenue Officer; signs of progress are crystal clear. NET delivered a 5th straight quarter of 10%+ Y/Y sales productivity gains and saw a “meaningful improvement” in account executives (AEs) meeting or exceeding their sales targets. The company set records in sales productivity across Europe and Asia Pacific, delivered an uptick in deal closure rates and shrank the sales cycle. It closed most of the customers from Q3 who slipped to Q4 due to go-to-market overhaul disruption. Great to hear.

While improvements have been notable, there’s more work to do. It has continued to accelerate the pace of AE hiring to finish bolstering its external sales team, but maintained its heightened pickiness with these employees. That’s in order to avoid repeating the past mistake of large hiring needs leading to lower quality reps. In terms of where this hiring is focused, 80% is within the enterprise segment, as it pushes up-market with great success. For example, $1 million+ customers rose from 118 to 173 Y/Y, as NET delivered 47% growth in 2024. The most impressive piece? Half of these adds came in Q4. While the company is still playing catch-up in rebuilding this salesforce, it hinted at solving this growth bottleneck by the end of next quarter, when it expects a more pronounced growth acceleration to unfold.

Cloudflare isn’t “limited by its opportunity, competition, product innovation or network.” They’ve been limited by go-to-market, and 2025 should be the year that changes. When pairing this with the conservative guidance methodology, a miss for an expensive name like this being rewarded makes a bit more sense.

While Cloudflare is fixing its issues internally, the exogenous backdrop is also brightening to add fuel to this go-to-market fire:

“As we've talked about multiple times, since the beginning of 2024, customers have been disciplined to budgets, scrutinizing deals carefully and ensuring every dollar spent delivered clear and immediate value. That trend continued through Q4. However, as the quarter progressed, we saw encouraging signs that confidence is beginning to return, particularly in The U.S.”

Founder/CEO Matthew Prince

For examples of deals signed during the quarter to highlight this momentum:

AI – 4 Opportunities:

NET sees 4 main opportunities in the realm of AI. The first two are using these apps to make itself more efficient and its product smarter. Simple enough. The next opportunity is in its unmatched ability to tune, optimize and granularly match inference needs with available compute. You pay as you need it with NET, and considering needs violently fluctuate, this leads to considerable savings. This edge merely builds on NET’s ability to make GPUs work better via its own software optimization work.

For evidence of a relative price lead, its AI Gateway (to manage and perfect apps) is delivering 10x price performance benefits for building AI agents vs. competitors. It thinks it has a lot more optimizing to do to make sure things like Nvidia GPUs work best on its platform. It sees “DeepSeek equivalent optimizations” coming for its ability to foster world-class inference efficiency. Lastly, it thinks its positioning between internet users and AI companies is ideal. It can do things like “figure out how content creators are compensated, what agents are allowed where and how the AI-driven web will fit together.” Playing a role in this organization, it thinks, is a massive opportunity.

I still have to read the Q&A, but I thought this was an interesting quarter. We can’t call the actual numbers all that amazing, but we can confidently call large client momentum excellent. NET’s team brilliantly depicted their optimism for 2025 and probably left most thinking guidance will be easily surpassed. After all, that’s what NET does basically every quarter. They kept attention on the potential rather than the actual guidance and that potential is admittedly exciting.

The only thing I don’t love about this company is the valuation. The product suite is elite and quickly proliferating in the massive network security market. The financials are elite; the balance sheet is beautiful; the opportunity is large; the founder is a visionary; the go-to-market has been fixed. This is a fundamental darling and those willing to pay up for it have been handsomely rewarded. I see better risk/reward stocks, but I also see very few higher quality companies in its enterprise software world.