Cloudflare (NET) stock has surged by 87.3% in the past three months, outperforming the Internet – Software industry’s growth of 38.7%. Investors are now debating whether to double down on NET stock or exercise caution due to its premium valuation compared to industry peers.

Cloudflare’s momentum can be attributed to success with Cloudflare One bookings, AI portfolio traction, and U.S. federal agency acceptance post FedRAMP certification. Despite recent gains, the stock is trading at a significant premium with a forward 12-month Price/Sales of 27.72X compared to the industry’s 5.7X.

The company’s revenue growth has been declining over the past three years, with a 25% projected growth rate for 2025, down from 28.8% in 2024. Cloudflare faces macroeconomic headwinds due to a significant portion of its revenues coming from outside the U.S., impacted by the government’s tariff stance.

Cloudflare’s shrinking margins are a result of intense competition in the content delivery and cybersecurity spaces. Competitors like Amazon, Akamai Technology, Palo Alto Networks, and Zscaler pose challenges to Cloudflare’s market dominance, affecting its bottom-line growth rate for 2025.

Investors are advised to exercise caution with Cloudflare stock despite its recent surge and market position. The company faces macroeconomic and operational challenges, leading to a Zacks Rank #5 (Strong Sell) rating. With a stretched valuation, it may be prudent to wait and monitor Cloudflare’s performance before making investment decisions.

Read more at Nasdaq: NET Surges 87.3% in 3 Months: Should You Buy, Sell or Hold the Stock?