Cloudflare's Pullback: A Buying Opportunity or a Warning Sign?

Cloud computing services provider Cloudflare (NYSE: NET) is often described as an invisible shield that keeps businesses more secure online. The company claims to protect 20% of all websites with its cybersecurity offerings.

Doing that big job provided big rewards to its shareholders in 2025, as the stock price climbed 83%. However, near the end of February, Cloudflare stock sank sharply, which may have prompted some investors to question whether they can expect those types of gains to continue.

Was this pullback an opportunity or a warning sign?

Image source: Getty Images.

Keeping security tight

To describe Cloudflare's operations in detail, a person would have to invoke such jargony terms as DDoS mitigation, content delivery network, and transport layer security.

Thankfully, as investors, we don't have to get that technical, as the company has a nice, straightforward elevator pitch on its website: "People use Cloudflare services for the purposes of increasing the security and performance of their websites and services."

Essentially, it protects websites, apps, and software programs from attacks, and -- via a vast network of hardware spread out in nodes located closer to actual users -- speeds up the response times of those websites and services. It also lets companies build, deploy, and secure access for artificial intelligence (AI) agents to interact with various features of their apps.

Its customers include Shopify, SoFi, and DoorDash.

Sales are strong, as the company announced in Q4 2025, it closed its largest deal ever by annual contract value -- averaging $42.5 million in revenue per year.

In total, its revenue climbed by 30% in 2025.

Why did the stock price drop?

On Feb. 20, Cloudflare opened at about $190 per share. On Feb. 24, it opened near $160, a decline of more than 16% in just a few days.

While seeing the price of a stock you own fall is never fun, it doesn't appear that issues specific to Cloudflare's business caused this sell-off.

Rather, the dip seemed to be driven by a combination of factors, including investors taking profits after the stock's jump earlier in the month following its earnings report. The price drop also coincided with a period of increasing uncertainty around tariffs and a broader sell-off in software stocks that was triggered by fears that AI would disrupt many software-as-a-service companies' business models.

Meanwhile, since then, the stock price has rebounded to around $190.

For shareholders, this type of sell-off is better than one caused by fundamental business issues. However, it is a reminder that the near-term performance of a high-growth stock can be more susceptible to outside forces.

Investing for the future

If you believe that robust cybersecurity will become increasingly complicated and more important to enterprises as AI's capabilities expand, you may want to consider adding Cloudflare to your portfolio.

Just in January alone, CEO Matthew Prince said the number of weekly requests generated by AI agents across the Cloudflare network more than doubled.

He also said that, because 20% of all websites are protected by Cloudflare, AI agents have to interact with the company's systems. According to Prince, that will let the company help define "what the rules and the rails and the guardrails of the future of agentic commerce is going to look like and be."

The stock currently trades at a forward price-to-earnings ratio of roughly 154, so new investors will really have to pay up for the company's expected future growth. These higher expectations also leave the stock more vulnerable to sharper price declines if the company doesn't execute as expected. In that context, it's worth noting that Cloudflare's net losses widened from $78.8 million in 2024 to $102.3 million in 2025.

If you believe in Cloudflare as a long-term investment, any meaningful pullbacks (such as the one that occurred in February) can be viewed as good moments to consider starting a position or adding more shares. Shares may only get more expensive over time if Cloudflare executes on its CEO's vision of becoming one of the key networks that AI agents must pass through in order to complete their tasks.

Jack Delaney has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Cloudflare. The Motley Fool has a disclosure policy.