Update, August 18, 2026: this piece explains the widened $170.0M quarterly loss as "the usual software story — stock compensation and depreciation." That is incomplete. Cloudflare announced a restructuring on May 7, 2026 that cut about 20% of its workforce, and it guided to $140-150M of charges with the majority falling in the June quarter — most of the year-over-year increase in the loss, and a one-off rather than a trend. Our forward model treats it that way, and assumes the cut converts into operating leverage from here.
Cloudflare joins r40 coverage with eighteen quarters of history, a passing Rule of 40, and one line moving steadily in the wrong direction.
The growth is intact
June-quarter revenue was $696.1 million, up 35.9% year over year and 8.8% sequentially. Trailing twelve-month revenue is $2.51 billion. Free cash flow was $67.6 million, a 9.7% margin, and Cloudflare has now been free-cash-flow positive in seventeen of the last eighteen quarters — the exception being the March 2022 quarter.
Growth of 35.9% plus a 9.7% free-cash-flow margin gives a Rule of 40 score of 45.6. It passes, and it has passed comfortably for years.
The margin is not
| Quarter | Revenue | Gross margin | Free cash flow |
|---|---|---|---|
| 2022 Q1 | $212.2M | 77.8% | −$59.9M |
| 2023 Q2 | $308.5M | 75.6% | $25.7M |
| 2024 Q2 | $401.0M | 77.8% | $45.2M |
| 2025 Q2 | $512.3M | 74.9% | $39.9M |
| 2026 Q1 | $639.8M | 71.2% | $93.1M |
| 2026 Q2 | $696.1M | 71.8% | $67.6M |
Gross margin peaked around 77.8% and now sits at 71.8% — six points gone, and the decline is monotonic once you smooth the quarters. Cost of revenue grew 52.7% year over year against revenue's 35.9%.
The reason is not pricing. It is what the network now does. Serving a cached byte from a PoP is close to free at the margin; running inference on a GPU sitting in that same PoP is not. Cloudflare has been explicit that it is building the edge into an inference layer, and the cost of revenue is where that decision shows up first.
The loss widened sharply
GAAP net loss for the June quarter was $170.0 million, or −$0.48 per diluted share — against a $50.4 million loss in the same quarter a year earlier. That is the largest quarterly loss in the tracked window by a factor of three, and it sits alongside record revenue and positive free cash flow. The gap between the two is the usual software story — stock compensation and depreciation on a network being built ahead of demand — but the direction is worth watching rather than waving through.
What to watch
- Does gross margin stabilise near 71%? Two consecutive quarters around 71–72% could be a floor, or a waypoint.
- Does free cash flow keep pace? It fell sequentially from $93.1M to $67.6M even as revenue rose $56M.
- The Rule of 40 has room, but less than it looks. At 45.6, roughly four points of it come from a free-cash-flow margin that is itself a function of how hard the network is being built.
The Street is unusually cautious
Consensus is Buy at an average target of $333.55, only about 11% above the $299.23 price — the narrowest implied upside of any name added to the site recently. The split is real: Mizuho raised to $375 and Stifel sits at $370, while J.P. Morgan and Susquehanna both hold, the latter having lifted its target to $300 — essentially the current price.
A note on the numbers
Cloudflare is a US domestic filer, so every figure here comes from its own XBRL: revenue, gross profit and per-share earnings from the quarterly and annual filings, with fourth quarters derived by subtracting nine-month figures from the full year. Free cash flow is operating cash flow less purchases of property and equipment, reconstructed the same way because 10-Q cash-flow statements are year-to-date rather than quarterly. Reconstructed trailing revenue of $2.51 billion reproduces the reported figure exactly, and fourth-quarter earnings per share were cross-checked against net income divided by diluted shares.
