Cloudflare forecasts slower growth, disappointing AI-focused investors

Cloudflare delivered a Q1 earnings beat and still watched its stock crater. The company posted adjusted earnings per share of $0.25, clearing the $0.23 consensus estimate, but its Q2 revenue guidance told a different story: growth of up to 30%, a notable deceleration from 33.5% in Q1.

Wall Street’s reaction was swift and unforgiving. Shares dropped more than 15% in premarket trading on May 8, 2026, then extended losses to over 18% after hours.

The numbers behind the selloff

Cloudflare reported 72.8% gross margins for Q1, which represents a record low for the company, down 4.3 percentage points year over year. That compression suggests rising costs, particularly those tied to AI infrastructure, are eating into profitability faster than revenue can compensate.

In tandem with the earnings report, Cloudflare announced a 20% reduction in its workforce. The company attributed the cuts to AI-driven efficiency gains, framing the layoffs as a response to how artificial intelligence is reshaping internal operations.

What this means for investors

Several brokerages raised their price targets following the earnings report, pushing the median price target to $243. That disconnect between analyst sentiment and market reaction suggests momentum-driven investors are repricing the growth trajectory rather than fundamental analysts abandoning the thesis.

Jefferies flagged near-term growth risks for the company, with concern centered on whether the slowdown is a temporary blip or the beginning of a more sustained deceleration as AI-related spending patterns shift.

The gross margin deterioration deserves close monitoring in coming quarters. A 4.3 percentage point year-over-year decline is significant, and if AI infrastructure costs continue rising while revenue growth decelerates, the squeeze could intensify.

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