Cloudflare's (NET) outage could cause short-term brand damage, says analyst
Cloudflare (NET), a cloud-based cybersecurity and infrastructure company, suffered an outage early Tuesday morning that disrupted the internet globally, hampering the performance of websites worldwide.
ChatGPT, Spotify and X all experienced disruptions due to the outage.
At about 8 am EST, Cloudflare's system status said that a "fix has been implemented and we believe the incident is now resolved." However, it continued having "reports of intermittent errors" for a couple of hours after the fix.
After the company reported that the issue had mostly been resolved, Cloudflare's chief technology officer Dane Knecht posted an apology on X, while explaining what caused the outage.
"In short, a latent bug in a service underpinning our bot mitigation capability started to crash after a routine configuration change we made," Knecht said. "That cascaded into a broad degradation to our network and other services. This was not an attack."
He added that the "issue, impact it caused, and time to resolution is unacceptable."
"Work is already underway to make sure it does not happen again, but I know it caused real pain today," Knecht said. "The trust our customers place in us is what we value the most and we are going to do what it takes to earn that back."
Cloudflare's stock fell as much as 5% in pre-market trading.
Recent history shows brand damage could be limited
The incident on Tuesday brought to mind a much larger one that roiled CrowdStrike Holdings (CRWD) last year, when the cybersecurity giant suffered what many call the largest IT outage in history.
The outage last July was caused when a faulty update to its Falcon platform triggered a global meltdown, causing 8.5 million Microsoft Windows systems to crash and fail to restart properly.
The list of disrupted industries was staggering: hospitals, banks, airports, airlines, and even stock exchanges were affected.
CrowdStrike’s stock plunged 36% over the following 11 trading sessions.
And while the company may have suffered a reputational blow after the outage last year, CrowdStrike has since recovered and its stock is up 51.7% YTD.
Cloudflare could also experience a similar short-term hit to its brand because of this incident, according to TD Cowen analyst Shaul Eyal.
In a client note on Tuesday, Eyal said that the company "remains constructive on long-term fundamentals despite dear-term disruption," but noted that it potentially faces "reputational and operational risks short term."
Eyal maintained a Buy rating for Cloudflare and reiterated a $265 price target.
What should help Cloudflare manage the fallout is that it has emerged as a key building block in the AI infrastructure boom.
With its Cloudflare Workers platform, the company is helping some of the biggest tech firms transition to agentic computing interfaces in a way that saves them from having to rebuild their tech stacks.
This includes connecting clients directly to AI agents like Claude, the assistant developed by Anthropic.
And on Monday, the company announced that it had acquired Replicate, an AI platform that allows developers to seamlessly deploy and run AI models.
Cloudflare said that the acquisition "will accelerate the company’s vision to make Cloudflare Workers the leading end-to-end platform for building and running scalable, fast, and reliable AI applications."
The company's stock has surged 82.5% for the year.