AI Stocks: Why Cloudflare Revenue Upside Looms From OpenAI Cloud Deal

With many investors eyeing AI stocks, the December-quarter earnings report of Cloudflare (NET) looms. Analysts will likely expect management’s outlook on potential revenue upside for NET stock from Cloudflare’s internet deal with artificial intelligence startup OpenAI.

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Fourth-quarter earnings for Cloudflare stock are due after the market close on Thursday. Cloudflare stock climbed 3% to 58.37 on the stock market today.

OpenAI’s launch of ChatGPT, a conversational chatbot, has triggered an AI war between Google-parent Alphabet (GOOGL) and Microsoft (MSFT). Both Microsoft, the biggest investor in OpenAI, and Google aim to embed content-creating generative AI technologies into their internet search products.

AI Stocks: Cloudflare Upside From OpenAI?

Microsoft hosts a press event today to focus on ChatGPT integration into its Bing search engine. Usage of ChatGPT has exploded since its debut on Nov. 30. Potential upside for Cloudflare is related to how ChatGPT queries are processed in the internet cloud.

Started in 2009, San Francisco-based Cloudflare speeds up and provides security for web applications routed through its intelligent global network.

“What investors might have missed is that the ‘performance and security’ of chat.openai.com is done by Cloudflare,” SVB MoffettNathanson analyst Sterling Auty said in a note to clients.

In a preview of Cloudflare’s fourth-quarter earnings, RBC analyst Matthew Hedberg said:  “In terms of incremental 2023 drivers, we look to Apple and ChatGPT as interesting growth opportunities.”

One concern for Cloudflare shareholders, though, is that the company could lose 2023 revenue from cryptocurrency customers. That could offset some upside from OpenAI.

Cloudflare Earnings Due Feb. 9

At SVB MoffettNathanson, Auty noted that “When logging into ChatGPT for the first time on a new device, users will frequently get a screen that says: “Chat.openai.com Checking if the site connection is secure” Further, keen observers will notice that at the very bottom of this page, it shows “Performance & Security by Cloudflare,” Auty added.

According to Auty: “The demand for ChatGPT drives usage of Cloudflare’s network, resulting in more revenue for Cloudflare. In our eyes, Cloudflare’s opportunity to be the CDN (content delivery network) and security vendor of choice for not just ChatGPT, but other AI platforms is massive.”

ChatGPT uses AI to produce humanlike responses to search queries based on data scooped up from the internet.

Analysts estimate fourth-quarter profit of 5 cents for NET stock, up from zero profit a year earlier. Analysts estimate revenue growth of 41% to $274.1 million.

For full-year 2023, analysts predict profits of 15 cents a share for Cloudflare stock. Analysts estimate 34% revenue growth to $1.31 billion.

Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on 5G wireless, artificial intelligence, cybersecurity and cloud computing.

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