Why is $NET the largest position in my portfolio?

Revenue growth accelerated to +33.6% YoY, RPO grew +47.9%, cRPO accelerated to +33.1%, and the company added a record level of net new ARR at $210M, up +76% YoY. Customer adds were also exceptional, with 36,900 net new customers in the quarter and 289 net new large customers. For a company already at scale, numbers like that matter.

Margins were better than the surface read suggests. Gross margin moved down to 74.9%, but free cash flow margin improved sharply to 16.2% from 10.4% a year ago. Operating margin held at 14.6%. Sales efficiency improved materially. CAC payback fell to 15.3 months from 20.4 months in Q4 2024, while sales productivity rose for the eighth consecutive quarter and moved above the prior 2021 peak. Go-to-market restructuring is now showing up clearly in the model.

Retention improved too. NDR reached 120%, the highest level in three years. Pool-of-funds contracts are becoming a real growth driver, representing 20% of Q4 ACV and a mid-teens percentage for full-year 2025. Record ACV generation, record large-customer adds, and stronger retention usually do not happen together by accident.

My positive read starts with growth quality. Large customers now contribute 73% of revenue, up from 69% last year. Customers spending more than $100K reached 4,298, up 23% YoY. Customers spending more than $1M reached 269, up 55% YoY. New ACV grew nearly 50% YoY, the fastest pace since 2021. Cloudflare is no longer just landing logos. It is expanding deeper into larger enterprises and doing it across more products.

Then there is the product angle. Zero Trust is scaling well, helped by AI-related security demand. Workers AI and the broader developer platform are pulling in both startups and large enterprises. Management said weekly AI agent traffic more than doubled in January. With over 20% of the web behind Cloudflare, rising agent traffic naturally lifts demand for networking, bot management, security, and edge compute. Act 4 may still be early, but the strategic position looks real.

One question sits over the whole setup: is the valuation already pricing in too much of the future? At around 26.9x forward EV/Sales and 192.8x forward P/E, the stock is clearly not cheap. On PEG, it looks expensive. Market is asking for continued execution, continued growth acceleration, and continued proof that new AI-related demand turns into durable revenue.

Still, premium valuations often belong to premium businesses. Cloudflare has a credible case. Analysts assign a wide moat, supported by network effects, scale, and rising switching costs as more customers adopt an integrated stack. The company operates across 330+ cities in 100+ countries, blocks roughly 215 billion cyber threats daily, and continues to deepen relevance across security, networking, and developer infrastructure. Platform breadth is becoming a commercial advantage, not just a product narrative.

Q4 also showed improving leading indicators. Billings growth slowed to 26.8%, which may worry some investors, but billings can be noisy. cRPO is more useful here, and it accelerated. Guidance also looks solid. If Cloudflare beats Q1 the same way it beat Q4 by 4.2%, revenue growth would move toward roughly 35.1% YoY. Not guaranteed, but the setup is there.

Product momentum adds another layer. AI Gateway, Workers AI, Durable Objects, Containers, AI Crawl Control, and the Human Native and Astro acquisitions all point in one direction: Cloudflare is trying to become core infrastructure for the agentic web, not just a security vendor or CDN. Zero Trust continues to benefit from demand for tighter access control as agents gain more system-level permissions. Cloudflare One and SASE are also getting stronger through channel expansion and more mature enterprise sales execution.

Customer evidence backs the thesis. A leading AI company signed a 2-year, $85M pool-of-funds contract with 100% traffic allocation. Another AI company signed a 1-year, $5.4M Workers and Application Services deal. A Fortune 500 technology company signed a 2-year, $45M pool-of-funds agreement. A U.S. media company signed a 3-year, $3.1M contract tied to AI Crawl Control after scraping pressure drove infrastructure costs higher. Large enterprise demand is broadening across AI, security, and application delivery.

Balance sheet remains solid. Cash and investments were around $4.1B at quarter end. Debt increased after the $2B 0% convertible issuance in 2025, but liquidity is strong. Dilution also remains manageable for a company at this stage, with weighted-average basic shares up 2.1% YoY. SBC at 22% of revenue is not low, but for a company still compounding above 30% and investing heavily in product, it is not out of line.

My takeaway. Cloudflare is executing at a very high level. Growth is accelerating. Retention is improving. Customer quality is improving. Sales efficiency is improving. AI is becoming a real tailwind across multiple parts of the platform. Main debate is no longer whether Cloudflare has a strong business. Main debate is how much of that strength is already in the stock.

Right now, the premium still looks earned.