Cloudflare has received a rare double upgrade from bank of america, raising its rating from Underperform to Buy, driven by the company's improving fundamentals and strong growth potential in AI and network security.

The upgrade is supported by two key catalysts: Cloudflare's differentiated approach to artificial intelligence and its momentum in network security, particularly in Secure Access Service Edge (SASE).

The stock rises more than 5% on Tuesday following the upgrade.

BofA analysts, led by Madeline Brooks, set a price target of $160 per share, up from $60, projecting a 29% upside from its current levels. This target reflects the bank's optimism about Cloudflare's leadership potential in AI-as-a-Service (AIaaS), a space that is expected to become the preferred method of AI consumption for enterprises. According to Brooks, "AIaaS is already resonating with customers, with average AI spending expected to rise by 8% to $100k per customer, or 15% of total customer spending."

In addition to AI, Cloudflare's strong performance in network security, especially in SASE, is driving the company's growth. Cloudflare's security products have captured 33% of the market share, with over 50% of new spending in the next 12 months expected to go toward security products. This trend is poised to challenge industry leaders like CheckPoint and Cisco, as customers modernize their network security with software solutions. 

"Cloudflare's network security offerings are showing strong momentum and capturing market share from competitors," said Brooks. "We place a high probability on cloudflare becoming the leader in AI-as-a-Service (AIaaS), which we expect will be the AI consumption method of choice for Enterprises."

BofA analysts have raised their three-year compound annual growth rate (CAGR) forecast for Cloudflare to 30% by 2028, up from their previous estimate of 25%. This growth outlook is based on Cloudflare's expanding AI and network security capabilities, as well as its potential to dominate the AIaaS market.

Despite the bullish outlook, BofA analysts acknowledged risks to their thesis, including the ambitious goal of achieving $5 billion in revenue by 2028, which would require a reacceleration of revenue growth. "This ambitious goal demands near-perfect go-to-market execution, especially among enterprise customers," they noted.

As of now, 14 out of 34 analysts covering the stock have rated it a Buy or Strong Buy, while 16 have a Hold rating, and four have assigned Underperform or Sell ratings.