NET · Research
Cloudflare Is Building the Toll Booth for Agent Traffic. Its Owners Have Never Been Paid, and the New Shares Carry No Vote
Revenue grew 35.9% and net retention rose to 120%. But owner cash after stock pay was -$192.8M over twelve months, and a June vote lets the co-founders keep control through nonvoting Class C shares.
- Owner cash after all capex and stock pay
- -$192.8M
- Stock pay as a share of operating cash flow
- 80.2%
- Share of the workforce cut in the May 2026 restructuring
- About 20%
1. Verdict and what this piece answers
Verdict: watch. There is no positive anchor to value.
Owner cash, meaning operating cash flow less purchases of property and equipment and capitalized software, less stock pay, was -$192.8M for the twelve months to Jun 30, 2026, our calculation [1][8]. It was negative in each of the last three full years and got larger as the business grew: -$154.5M in 2023, -$171.6M in 2024 and -$190.9M in 2025 [7][8].
Under our standard, a base value needs three positive years, so none is set. Cloudflare discloses no finance leases; its network runs on operating leases for colocation space, which already sit inside operating cash flow [1].
The market is paying attention to two things: revenue that accelerated to 35.9% growth in the second quarter, and a story about charging superintelligence agents for every request that crosses Cloudflare's network [2][9]. Both are real.
What gets less attention is who has been paid so far. Over the last twelve months, stock pay of $507.7M absorbed 80.2% of $633.4M of operating cash flow, our calculation [1]
2. Rating metrics
| Metric | Value |
|---|---|
| R&D share of revenue | 23.2%, research and development expense, six months to Jun 30, 2026, our calculation [1] |
| GAAP net margin | -14.4%, six months to Jun 30, 2026, our calculation [1]. Excluding $150.7M of restructuring charges, -3.2%; that clean figure still includes $80.1M of interest income on corporate cash, so the operating business lost money before restructuring [1] |
| API quality | 5 of 5, our scoring: a documented REST API with self-serve tokens; public pricing and published limits for Workers and most products; hosted MCP servers and an Agents SDK [10]; SDKs and tooling in several languages with a public changelog; and an ecosystem of developers that the company puts above 7.4 million accounts [9] |
| Toll-gate score | 2 of 4 pass, 2 partial (section 2b) |
2b. Thesis and the toll-gate test
A superintelligence agent that reads a page, calls an API or buys something has to travel over the network that sits in front of the site. Cloudflare's chief financial officer said on the second-quarter call that more than 20% of the web sits behind Cloudflare [9].
That makes it a natural place to ask the agent who it is, decide whether to let it in, and charge it. The question is whether that position is a toll gate the company owns or a service it resells at cost to customers who could move.
| Test | Result | Evidence |
|---|---|---|
| Owns the record | Partial | Cloudflare holds the routing, security policy and traffic logs for its customers' sites, and the identity checks on bots and agents run on that data [1][12]. It does not hold the customer's business record: orders, accounts and content stay with the origin |
| Owns the connection | Pass | Every request to a protected site passes through Cloudflare's network in more than 335 cities and over 125 countries [1]. Pay per crawl and the Monetization Gateway use that position to answer an agent with an HTTP 402 payment request before the request reaches the origin [10][11][12] |
| Prices close to outcomes | Partial | Workers bills on usage, charging only when code runs [9]. The Monetization Gateway charges per request for APIs, tools and data, but it is in closed beta and settles in stablecoins through a partner facilitator; Cloudflare has not disclosed its take rate or revenue [11] |
| R&D on the gate vs features | Pass | Spending goes to the network and the developer platform itself: Workers, the Replicate model-hosting acquisition, the VoidZero toolchain acquisition, bot identity, and payment rails [1][10] |
Two passes and two partials. Cloudflare owns the connection better than any other software company we cover, and it is spending on the gate rather than on features.
What it does not yet do is take a share of what crosses the gate. Until the Monetization Gateway or pay per crawl produces disclosed revenue, the toll is a plan.
3. Growth
| Measure | Value | Change |
|---|---|---|
| Q2 2026 revenue | $696.1M | +35.9% [2] |
| Six-month revenue to Jun 30, 2026 | $1,335.8M | +34.7% [1] |
| Trailing twelve-month revenue | $2,512.3M | our calculation [1][8] |
| Fiscal 2025 revenue | $2,167.9M | +29.8% [7] |
| Q2 2026 revenue through channel partners | $217.7M | +66.9%, now 31% of revenue against 25% [1] |
| Current remaining performance obligations, Jun 30, 2026 | About $1,748.5M | +35% [1][2], our calculation from 64% of $2,732.0M |
| Q3 2026 revenue guide | $736.0M to $737.0M | +31.0% to +31.1% against $562.0M [2][14], our calculation |
| Full-year 2026 revenue guide | $2,864.0M to $2,870.0M | +32.1% to +32.4% [2], our calculation |
Growth has accelerated: 29.8% in 2025, 34.7% in the first half of 2026 and 35.9% in the second quarter [1][7]. Two sources stand out.
The first is large customers: those paying more than $100,000 a year rose 26.6% to 4,698 [1]. The second is channel partners, whose revenue grew 66.9% while direct revenue grew 25.3% [1].
That shift deserves watching because partner revenue usually carries lower prices and gives Cloudflare less direct control of the customer.
The guide implies a step down to about 31% growth in the third quarter [2]. The print on Nov 5 will show whether the second quarter was a new level or a peak.
4. New products and how fast the company ships them
Cloudflare describes its history in acts. Act 1 was the network: content delivery, DDoS protection and DNS.
Act 2 was Zero Trust security, sold as Cloudflare One, which replaces corporate VPNs and firewall appliances by routing employee traffic through the same network. Act 3 is the developer platform built on Workers.
Act 4, in management's words on the second-quarter call, is charging agents for what they use [9].
The network. Cloudflare runs equipment in colocation facilities in more than 335 cities and over 125 countries, and it says its serverless architecture lets it add products to that network at low marginal cost [1].
That claim is under strain. Cost of revenue grew 53% in the second quarter against 36% revenue growth, and GAAP gross margin fell to 71.8% from 74.9% [1][2].
The company attributes the increase to $30.1M of higher third-party technology services costs, $20.9M of colocation, network and bandwidth costs and $10.1M of depreciation from more servers [1]. At the same time, purchases of property and equipment fell 21.0% in the first half, to 8.6% of revenue from 14.7% [1].
Our reading is that some capacity growth has moved from owned equipment to rented services, which flatters free cash flow now and lowers gross margin.
5. Net revenue retention
Dollar-based net retention was 120% in the second quarter of 2026, up from 114% a year earlier, and up from 118% in the first quarter and 119% in the third quarter of 2025 [1][14]. Cloudflare measures it on annualized revenue from paying customers, excluding free customers who upgrade [1].
The trend is the clearest proof that the platform sells more products into the same accounts: retention bottomed in 2025 and has risen each quarter since.
6. Free cash flow and owner cash
| Period | Operating cash flow | Capex and capitalized software | Stock pay | Owner cash |
|---|---|---|---|---|
| Fiscal 2023 | $254.4M | $134.9M | $274.0M | -$154.5M [7][8] |
| Fiscal 2024 | $380.4M | $213.5M | $338.5M | -$171.6M [7][8] |
| Fiscal 2025 | $603.1M | $342.6M | $451.5M | -$190.9M [7][8] |
| Six months to Jun 30, 2026 | $275.9M | $135.4M | $274.1M | -$133.7M [1] |
| Trailing twelve months to Jun 30, 2026 | $633.4M | $318.5M | $507.7M | -$192.8M [1][8] |
Cloudflare's own free cash flow was $56.4M in the second quarter and $140.5M in the first half [2]. Counting stock pay as the cost it is, owners lost $133.7M in the first half, our calculation [1].
The first half has three distortions, and they partly offset. Restructuring cash payments of $98.6M lowered operating cash flow; add them back and owner cash would have been -$35.1M [1][8].
But operating cash flow also included $80.1M of interest on $4,162.8M of corporate cash and securities, and a $127.1M rise in deferred revenue from customer prepayments [1]. Strip those out, as our standard requires, and the first-half figure is about -$242.3M, our calculation [1].
Stock pay is the line that decides this. It rose to $274.1M in the first half from $217.9M, 26% growth, and includes part of the $35M of stock-based restructuring costs [1].
7. Acquisitions in the last 24 months
Replicate, Dec 1, 2025: $57.4M of cash consideration, including $9.5M of holdbacks retained for up to 36 months [1]. VoidZero, Jun 1, 2026: $164.2M of total consideration, including $98.7M of Class A stock, with $143.0M recorded as goodwill and $26.5M as customer relationships [1].
Cash paid for acquisitions was $75.1M in the first half of 2026 [1]. Neither deal was material to the financial statements, and neither used debt [1].
The stock portion of VoidZero, 757,339 shares, adds to dilution in the same way stock pay does [1].
8. Risks and catalysts
Risks. Owner cash: it has been negative every year we measured and is not narrowing [8].
Gross margin: costs of rented technology services and network capacity are growing faster than revenue [1]. Execution after the restructuring: a 20% workforce cut while growing above 30% is a bet that internal agent tools can replace staff; the 10-Q warns it may not deliver the expected benefits [1].
Agent payments: the Monetization Gateway depends on the x402 protocol and stablecoin settlement through a partner, and the large card networks may build their own rails [10][11]. Governance: the co-founders control a majority of votes and the new structure lets them keep votes while selling stock [4].
Debt: $2.0B of 2030 notes and $2.5B of 2031 notes, both at 0% interest, convert into stock under set conditions [1][3].
Catalysts: third-quarter 2026 results on Nov 5, 2026 after the close (confirmed) [13]; the first quarter after the restructuring was substantially complete, Sep 30, 2026 (confirmed)
9. Valuation anchor and balance sheet
Because owner cash has been negative in each of the last three full years and the trailing twelve months, there is no valuation band and no base value [8]. The anchor to watch is the first full year of positive owner cash after interest income and prepayment builds are stripped out.
| Item | Dec 31, 2025 | Jun 30, 2026 |
|---|---|---|
| Cash and cash equivalents | $943.5M | $1,663.8M [2] |
| Available-for-sale securities | $3,157.7M | $2,499.0M [2] |
| Convertible notes due 2026, net, current | $1,291.3M | $1,293.3M [2] |
| Convertible notes due 2030, net | $1,974.1M | $1,977.0M [2] |
| Deferred revenue, current and noncurrent | $725.3M | $852.4M [2] |
| Total stockholders' equity | $1,459.1M | $1,620.0M [2] |
On Aug 13, 2026, after the quarter, Cloudflare issued $2.50B of 0% convertible notes due 2031 and spent $259.5M of the $2,462.3M net proceeds on capped calls that reduce dilution on conversion [3]. The $1,293.8M of 2026 notes matured on Aug 15, 2026 [1].
The new issue more than replaced them, so Cloudflare enters the fourth quarter with more debt and more cash than it held at midyear. The debt carries no interest, but it settles in stock or cash at the company's choice, so its real cost shows up as dilution or as cash at maturity [1][3].
Among infrastructure software peers, Cloudflare ranks near the top on growth and retention and near the bottom on owner cash, which was -7.7% of trailing revenue, our calculation [1]
10. Superintelligence angle
Tailwind, with one reason: agents multiply machine-to-machine traffic, and Cloudflare sits where that traffic meets the web, with a usage-billed platform to host the agents themselves [9]. Chief executive Matthew Prince described the shift on the second-quarter call as a rewrite of the internet for machine traffic, with Cloudflare building the controls, developer tools and payment rails [2].
The risk inside the tailwind is economic, not strategic. Agent traffic costs Cloudflare bandwidth and compute before anyone pays for it, which shows in the falling gross margin, and the payment rail that would make agents pay their way is in closed beta [1][11].
11. Leadership and control
Matthew Prince co-founded Cloudflare in 2009 and is chief executive and co-chair; Michelle Zatlyn, the other co-founder, is president and co-chair; Thomas Seifert is chief financial officer [4]. Doug Kramer stepped down as chief legal officer on Mar 31, 2026 and stays as a senior advisor; Alissa Starzak, previously deputy chief legal officer, succeeded him [6].
There is no independent chair. Seven non-employee directors sit on the board [4].
Control rests with the founders. As of Apr 30, 2026, Prince held 39.0% of total voting power and Zatlyn 13.4%, through Class B shares carrying ten votes each; executive officers and directors as a group held 52.4% [4].
The largest outside holders were Capital World Investors at 11.4% of Class A, Baillie Gifford and Morgan Stanley at 5.3% each, BlackRock and Vanguard Capital Management at 5.2% each and Vanguard Portfolio Management at 5.0% [4]. A special committee of three independent directors, formed on Oct 28, 2025, negotiated a new structure with the founders [4].
It creates a nonvoting Class C share issued one for one on every Class A and Class B share, and exchanges the founders' Class B stock for a new Series FF preferred stock with votes and no economic interest, plus Class A shares [4]. The preferred stock stays outstanding only while the founders serve and keep a set share of their economic position
12. Questions for the owner and predictions
Questions for the owner. First, after the 20% workforce cut, will stock pay fall in dollars in 2027, not only as a share of revenue?
Second, when will the Monetization Gateway and pay per crawl be disclosed as revenue, and what take rate does Cloudflare keep on each paid request? Third, how much of the 53% rise in cost of revenue is rented compute for agent workloads, and will gross margin recover as owned servers replace it?
Fourth, conviction on a 1 to 5 scale: our view is 3. The connection is real and retention is rising, but owners have never been paid, the payment toll is unproven, and the new share structure reduces outside owners' say in when they will be. The trigger to revisit is two straight quarters of positive owner cash after interest income, together with disclosed revenue from agent payments.
Predictions to register: third-quarter 2026 revenue lands at or above $737.0M, the top of the guide (80%); dollar-based net retention at Sep 30, 2026 stays at or above 120% (60%); third-quarter owner cash, after adding back restructuring cash and before stripping interest, is negative (65%); GAAP gross margin for the third quarter is below 73% (65%); Cloudflare discloses revenue or transaction volume for agent payments by Mar 31, 2027 (35%).
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