Fastly’s stock has greatly outpaced the market this year as it benefits from the digital transformation brought on by COVID-19, but is Fastly a buy?
Fastly (NYSE: FSLY) offers cloud computing services which are a “system built by developers for developers.”, according to CEO Joshua Bixby. It was founded in 2011 by developer, chief architect, and current executive chairperson Artur Bergman and went public in 2019.
Fastly’s services speed up the delivery of data through its edge computing and content delivery network (CDN) (servers placed geographically). These services help companies to handle traffic on websites and apps to enable frictionless performance securely. Fastly has seen a huge increase in traffic due to lockdown measures with both revenue and the stock price soaring, but is Fastly a good investment?.
The bull case for Fastly
Co-founder Bergman was frustrated by the limitations with existing dominant players like Akamai (NASDAQ: AKAM) and set out to rectify this. The chief product architect recently stated that they are “unafraid to undertake difficult projects” which has been key to their success.
Fastly is trusted by well-known companies such as Pinterest (NYSE: PINS), Shopify (NYSE: SHOP), and Spotify (NYSE: SPOT). It claims to have a customer satisfaction score of greater than 95% while handling over 800 billion requests per day. Fastly’s products work, which is demonstrated by Amazon‘s (NASDAQ: AMZN) use of Fastly’s CDN to load images on its homepage rather than its in-house CloudFront. Fastly also has partnerships with cloud giants AWS and Alphabet‘s (NASDAQ: GOOGL) Google Cloud Platform.
Management estimates that the market for edge-computing and CDN is expected to be valued at $35.8 billion by 2022, growing at a CAGR of roughly 25%. It is likely that these figures will have some degree of error but there is clearly a large runway for growth that is expanding. COVID-19 has also caused a digital transformation that will likely help Fastly’s long term prospects.
Fastly generates revenue from charging customers based on their usage of the platform and in the latest quarter revenue increased by 38% to $63 million. The dollar-based net expansion rate was 133%, meaning that customers increased their spend. In the last two quarters, the average customer has increased their spending from $607,000 to $642,000. The largest customers have grown through a “land and expand” strategy. On an annual basis, its customers increased spending by an average of 20% annually from 2014 to 2019.
Fastly, unlike many companies who have furloughed or laid off staff, is actively hiring in a number of locations worldwide. This is an encouraging sign for investors as it is expanding but is a small part of an overall investment thesis.
The bear case for Fastly
Fastly have a number of competitors, however, they believe they have a competitive advantage with their integration of products. Many of these competitors are much larger companies than Fastly with its market cap of roughly $8 billion, with greater resources at their disposal financially and more mature intellectual property. Fastly thus far have proven that it can compete with the giants but as a small company there are certainly higher risks.
Marketing and sales spend for the quarter was $19 million, representing 30% of revenue in order to attract new customers while research and development made up 23% of revenue at $14 million. This cash burn is not unusual for high growth companies but is definitely worth watching as it grows. Fastly ended the quarter with a loss of $12 million.
Fastly is also richly valued by traditional metrics which may be a concern for investors, but many of these tech companies remain overvalued by traditional metrics for years.
So, should I buy Fastly stock?:
Fastly appears to be a company firing on all cylinders and undoubtedly benefitting from the current economic environment. Although there is a short-term surge in traffic, Fastly has partnered and is growing alongside companies providing a long-term growth opportunity. The valuation is high but this mission-driven company’s long term prospects look bright. There will undoubtedly be volatility but this may be a good addition to a diversified portfolio.
Quickfire round:
Where is Fastly’s Headquarters?
San Francisco, California with five other offices worldwide.
When did Artur Bergman vacate the role of CEO?
In February 2020, stating “at my core, I am a developer”.
How many employees does Fastly have?
Roughly 705 employees according to LinkedIn and growing.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above Read our full disclosure policy here.