I don't usually write much about Cloudflare because it's extremely expensive, even more expensive than Palantir. The 15% drop after the earnings report seems to have attracted attention, but seriously, if it drops by 50%, then I'll become a buyer. The company itself is excellent, in the age of AI they control over 20% of the internet, etc., but it's expensive. Being able to own it for under $100 makes me happy. I'll leave what I saw in their earnings report aside; the decision is yours.

It was a solid earnings report. Revenue grew 34% year-on-year, EPS exceeded expectations, billing growth outpaced revenue, and management raised its 2026 revenue forecast. Now you'll say these are figures from a good quarter. So why the 15% drop?

Because a very different piece of news came out at the same time as the earnings announcement. Cloudflare announced it was laying off 20% of its employees, approximately 1,100 people, and directly attributed this to agentic AI fundamentally changing the company. CEO Prince said, "AI is now a fundamental part of our workforce," and that they are restructuring accordingly. This restructuring will cost approximately $140-150 million. Remember, I'll use this cost again shortly.

And this is exactly what the market couldn't digest. Because this statement can be read in two different ways. First reading: Cloudflare has truly internalized agent-based AI, it will increase operational efficiency, and these layoffs will significantly contribute to margin in the medium term. Second reading: Growth looks strong, but gross margin has already declined year-on-year, and on top of that, there's the burden of hundreds of millions of dollars in restructuring. Q2 guidance remained in full consensus, and even though they raised it to 2026, management projected $664-665 million for Q2, compared to the market's expectation of $665 million. This, in my opinion, was a good reason to sell a stock with such a high valuation.

Which side am I on? I lean more towards the first reading, and let me say this...

$NET has always been the answer to the question of who controls the internet for me. Every agent request, every API call, every machine-to-machine traffic passes through a network that Cloudflare already has in front of it. That architectural advantage hasn't changed. What has changed is how aggressively management has embraced this transformation, and it's now clearer.

But I can say this clearly: Gross margin declined, and Q2 guidance was exactly on market expectation. With these valuations, everything should have been perfect. It wasn't.

What I will be watching in the coming period are: how much of the restructuring costs translate into real productivity gains, whether gross margin can recover in the second half of the year, and whether the large customer cohort can maintain its growth momentum. If these three become clear, the decline this quarter won't be a problem.

Cloudflare hasn't ceased to be a good company. In fact, it may have been the company that most sincerely embraced this transition. It's just that the market chose to make it pay the price today. I'm continuing to hold onto my shares; I don't plan to add more at $150.