Key insights
- Cloudflare's stock fell sharply after mixed Q1 results. While billings beat expectations and full-year EPS guidance was strong, Q2 revenue guidance and adjusted gross margin disappointed, raising concerns about margin compression from its AI initiatives. A significant layoff (20% of staff) signals a shift towards AI-driven scalability. The market reacted negatively to the news, but the long-term impact remains uncertain.
Shares of cloud security and performance company Cloudflare (NYSE:NET) fell 24.3% in the afternoon session after the company reported mixed first quarter results with high expectations amid a share price run up heading into the prints making it hard for the numbers to impress.
In addition, adjusted gross margin came in at 72.8% versus the 75.1% the market expected, and Q2 revenue guidance ($664–665M) landed below the $666M consensus together undermining the core bull-case assumption that Cloudflare's developer-platform/AI mix would expand margins, not compress them.
On the other hand, Cloudflare blew past analysts' billings expectations this quarter and its full-year EPS guidance trumped Wall Street's estimates. Also the growth in high paying customers all confirmed that CEO Matthew Prince's "biggest tailwind in Cloudflare's history" claim about AI is showing up in the numbers.
But the bolder statement is the layoff (20% of staff): management is signalling they believe AI agents will let them scale revenue without scaling headcount, which is a structural margin thesis. There is a 210bps gross margin compression in the near-term cost (paid-vs-free traffic mix and developer platform load), but the FY26 operating income guide of $418–421M implies that the cost actions will more than offset this.
The stock market overreacts to news, and big price drops can present good opportunities to buy high-quality stocks. Is now the time to buy Cloudflare? Access our full analysis report here, it’s free.
Cloudflare’s shares are very volatile and have had 27 moves greater than 5% over the last year. But moves this big are rare even for Cloudflare and indicate this news significantly impacted the market’s perception of the business.
The previous big move we wrote about was 3 days ago when the stock gained 8.7% on the news that peer, DigitalOcean reported stellar Q1 2026 earnings report.
DigitalOcean reported a 22% year-over-year revenue increase and, crucially, a 221% surge in AI customer annual recurring revenue (ARR), proving that inference demand is moving from experimental to production scale. Because DigitalOcean specializes in serving small-to-medium digital native enterprises, its success signaled that AI adoption is broadening beyond tech giants, fueling optimism for other edge infrastructure providers.
Cloudflare is flat since the beginning of the year, and at $195.44 per share, it is trading 23.9% below its 52-week high of $256.79 from May 2026. Investors who bought $1,000 worth of Cloudflare’s shares 5 years ago would now be looking at an investment worth $2,838.
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