Market research firm IDC recently released a report stating that the global artificial intelligence (AI) market is now worth $235 billion, and the good part is that this technology still has a lot of room for growth over the next five years.

IDC estimates that global spending on AI and generative AI could hit $631 billion in 2028. There are several ways for investors to benefit from this massive opportunity. From hardware companies such as Nvidia to software providers such as Palantir and cloud computing companies such as Oracle, investors can be spoiled for choice when looking to buy an AI stock right now.

Cloudflare (NYSE: NET), however, may not be on many investors’ minds when scouting for an AI stock to add to their portfolios. The company has made its name in the cybersecurity industry by helping customers secure their internet connections while improving the reliability and quality of the connections at the same time. However, it is now making a concerted push in the AI market as well.

Let’s take a closer look at Cloudflare’s AI-focused initiatives and check why this technology has the potential to supercharge its growth.

Cloudflare has set its sights on lucrative AI markets

Cloudflare has been using its cybersecurity credentials to bolster its prospects in the cloud AI space. In September last year, the company launched the Workers AI platform through which developers can run AI inference applications on Cloudflare’s network. The company has been procuring Nvidia’s GPUs (graphics processing units) and networking switches to build an edge AI network in cities across the globe that will allow developers to make AI apps without having to purchase any hardware of their own.

Cloudflare says that it has now deployed GPUs across 180 cities globally. This number has the potential to go higher, considering that the company has data centers in 300 cities worldwide. The company says that it intends to “make it possible for any organization globally to start deploying AI models — powered by Nvidia GPUs, networking, and inference software — without having to worry about managing, scaling, optimizing, or securing deployments.”

In simpler words, organizations and developers looking to jump onto the AI bandwagon can simply rent Cloudflare’s infrastructure without having to incur the huge capital expenses they would have had to if they were to buy their own GPUs and deploy their own servers. It is worth noting that the infrastructure-as-a-service (IaaS) market that Cloudflare is targeting with this strategy is expected to be worth $580 billion in 2030.

Story continues

Additionally, the company currently has a platform of more than 1 million developers to whom it can upsell its new services, such as Workers AI. However, Cloudflare isn’t going to restrict itself to the cloud AI market. The company has just announced a new AI offering called AI Audit. The tool will allow websites and content creators to see how AI bots access and use their content, give them the ability to block access, and also charge for the content that AI bots are accessing.

In other words, Cloudflare could help content creators and websites charge AI companies, and it won’t be surprising to see this offering gain traction once it is completely rolled out. That’s because the adoption of generative AI in content creation is set to grow at an annual pace of 31% over the next decade, according to Market.us.

Cloudflare is already growing at a healthy pace, and AI could give it a shot in the arm

When Cloudflare announced its second-quarter 2024 results in August, the company reported a 30% year-over-year increase in revenue to $401 million. Even better, the company’s adjusted earnings doubled year over year to $0.20 per share. The impressive year-over-year growth in Cloudflare’s revenue and earnings can be attributed to its existing customers spending more money on Cloudflare’s offerings.

For instance, the number of Cloudflare customers with more than $100,000 in annualized revenue stood at 3,046 in the second quarter, up 30% year over year. That was higher than the 20% year-over-year growth in Cloudflare’s paying customer base last quarter. Moreover, the company’s dollar-based net retention rate of 112% in Q2 indicates that its existing customers have either increased their adoption of Cloudflare’s new offerings or are using more of its current services.

This metric compares the company’s revenue in a quarter to the revenue from the same customer cohort in the year-ago period, so a reading of more than 100% means that it has managed to win a bigger share of the wallets of its existing customers. Throw in the additional revenue opportunities that are likely to open up thanks to the company’s growing portfolio of AI offerings, and there is a good chance that Cloudflare will maintain its robust growth in the long run as well.

As it turns out, analysts expect Cloudflare’s earnings to increase at an annual rate of 62% for the next five years. That’s why investors looking to add a growth stock to their portfolios would do well to buy Cloudflare before it steps on the gas following a flat performance on the market so far in 2024.

Should you invest $1,000 in Cloudflare right now?

Before you buy stock in Cloudflare, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Cloudflare wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $765,523!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of September 30, 2024

Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Cloudflare, Nvidia, Oracle, and Palantir Technologies. The Motley Fool has a disclosure policy.

Artificial Intelligence (AI) Spending Is Set to Hit $631 Billion in 2028: 1 Magnificent Stock to Buy Right Now Before That Happens was originally published by The Motley Fool