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Equity Focus: Fastly (FSLY.)

We write our equity focus articles to provide you with an insight into a company. It is purely educational, and should not be regarded as investment advice. In fact, the information contained in this article on Fastly barely touches the surface of what would be included in a true equity research report. For this reason, please make sure to carry out your own research before making any investment decisions. Now, onto the good stuff...


Fastly is a name on every investors' lips at the moment. Since its mid-March lows, the stock's price has risen some 1000 per cent, making it the best performing tech stock during the Covid-19 pandemic. It has even outperformed the likes of Zoom and Shopify!


What exactly is Fastly?

Fastly is a cloud-based content delivery network (CDN) company that helps users view digital content more quickly. The company also provides security, video delivery, and so-called edge computing services. The benefits of increasing digital speed are evident – for one of its customers, Buzzfeed, a loading page speed increase from 1.5 seconds to 0.5 seconds helped maintain twice as many users.

Fastly is a highly programmable platform that allows users to customise it as they wish, to best suit their needs. The company was founded in San Francisco in 2011, and employs over 190 people.

As the economic effects of the pandemic have begun to settle in, investors have been drawn to Fastly's stock as a way to benefit from increased internet usage by U.S. users. Its customers include some of the world’s most prominent digital companies, including Pinterest, Shopify, Vimeo, Twitter, Spotify, and plenty more. The fact that it has attracted such high-profile customers, and maintains partnerships with Amazon, Microsoft, and Alphabet, among others, clearly demonstrates wider confidence and trust in its service from some of the world’s leading [cloud-based] companies.

Products The edge cloud is a new model being applied in the world of cloud computing. Traditionally, services are provided from large central servers and data centres by a small group of providers. The edge cloud, on the other hand, uses the smart devices connected to provide the processing power needed to provide digital content. As a result, services and platforms can become faster. As technologies such as 5G continually develop, such speed and security are of vital importance – echoed by the belief [on Fastly’s part] that three-quarters of global data will be created and processed at the network edge by 2022.





As aforementioned, Fastly’s platform and products are programmable. This allows developers and customers to design and create their own applications – offering flexibility and proprietary development capabilities – while utilising Fastly’s speed and security offerings.


Historical Performance

Fastly's share price movement over the last few months has skyrocketed. Over 944 per cent up since 16/3/2020, and 440 per cent up YTD (at the time of writing), Fastly has surpassed expectations and its rapid growth was largely unforeseen. However, the increase in price lately has been to do with its forward guidance, its growing list of top technology and eCommerce customers, and their immediate demand for next-generation applications and digital platforms. Many of its customers are generally seeing large usage spikes during the current Covid-19 pandemic, and with an increase in working-from-home globally, Fastly’s share price continues to be pushed upwards. When you couple Fastly’s extensive list of customers that are performing well in this pandemic-driven economy, with the fact that Fastly has limited exposure to industries affected by the coronavirus pandemic, it is of little surprise that the management team have recently revised 2020 expectations upwards. The question is, at a current share price of $116 (just $11.13 on 16/3/2020), has the share price risen too far? As an investor, has the wave of momentum already passed a fair valuation point, or is this just the beginning for Fastly?



Case for Investment and Growth Opportunities

- Annual revenue for 2020 is now expected to be between $290-300m, which is higher than the previous guidance and target range of $255-265m. This is also about 40-45 per cent higher than the $200.5m revenue delivered in 2019. Fastly also improved its earnings from a loss per share of $0.30 in the year-ago quarter to earnings of $0.02 in Q2 2020. That outpaced analysts' consensus estimate of a loss per share of $0.01. - Q2 revenue was strong, at $75m (up 62 per cent yearly). The company also grew its total customer base to 1,951 from 1,837 in the previous quarter — the largest quarterly increase since its IPO.


- On June 17th 2020, Fastly announced that its network had reached a speed capacity of 100 terabits per second of connected edge capacity – an increase of almost fourteen per cent since the end of March. At this speed, it can provide greater scale, speed, and safety to its customers, and is now capable of handling more than 800 billion requests per day!

- Fastly recently acquired “a talented team and intellectual property” from Tesuto, a virtual network emulation platform. This will help to improve Fastly’s network capabilities and reliability. "By adding Tesuto's network emulation technology to Fastly's modern network, deployments can be more frequent, efficient, and effective, allowing the network to adapt and scale faster than ever before."

- The coronavirus pandemic is fast-tracking the digital transformation of many firms, and with a need to engage digitally with customers, Fastly represents the perfect partner to help do so. At the moment, given the macro situation, Fastly is also ensuring that tech companies are able to handle the upturn in audience numbers in a secure manner.



- The company's enterprise division -- which constitutes 88 per cent of Fastly's sales -- continued to expand in Q1. Fastly now has 304 enterprise customers (up from 297 in Q1 2020) defined as customers who spend $100,000 or more with Fastly annually, and the average spend is $716,000 per enterprise customer, also up from $600,000 in Q4 2019.


- Shopify, one of Fastly’s customers, recently announced a deal with Walmart, which will allow Shopify businesses to sell their products on Walmart’s online site. As a provider of technology platforms for Shopify, Fastly will benefit from this deal, and actually saw their share price (11.7 per cent) drive higher than Shopify (7.5 per cent) based on the news of the deal. Plenty more future deals of a similar manner could benefit Fastly. Its long list of high-profile customers will fuel Fastly’s growth for years to come.

- The content delivery network (CDN) market is estimated to grow to be worth some $22bn by 2024, and Fastly is well-positioned to capitalise on this growth.

- Fastly is tapping into a growing need for speedier websites, apps, and online services. All of this sets up the company for even more growth in the coming year.

Risks

- Will this recessionary environment persist? How long will people around the world continue to work from home, and will this need for Fastly’s products continue to increase rapidly? The recession could last for months to come, and Fastly’s free cash flow margin does not suggest that it could support this. Having said this, while the company has a negative free cash flow (Q2 2020: -$12m), this is an improvement from -$50.8m in Q4 2019.

- Fastly’s main customers and clients could develop their own cloud “edge” platforms. Netflix uses its proprietary system, as do many other large companies, and over time, this capability may outgrow the need for the services offered by a firm such as Fastly.

- The share price is volatile. It has risen exponentially in the last weeks and months, but over the next period of time, we could see increased volatility. The share price could continue its dramatic ascent, but also fall fairly quickly if investors don’t believe in the long-term prospects of the company.

- Fastly has a market cap of $8.9bn, which is effectively half of Akamai’s valuation, one of its major competitors. Although Fastly refer to Akamai as a legacy provider, Akamai has a history of profitability, a larger market share, and generates significantly more revenue than Fastly. Nevertheless, Fastly may be justified in labelling Akamai as a legacy brand, given that the latter is growing at a slower rate than Fastly. Limelight Networks is another provider, that despite having a market cap of $875m, is already cash-flow positive, and is generating similar amounts of revenue to Fastly – definitely one that Fastly will be concerned about and watching closely.


Q2 Financial Statements


Final Thoughts

Fastly is a small player in a large market. However, the market is expanding, offering Fastly plenty of opportunity and room to grow. As one analyst states, “growth will be the top concern of investors for the foreseeable future and it will have to convince them that it can deliver long-term value rather than short-term hype.”


Fastly is on a disciplined path to profitability, and if it can prove to investors that it can escape the red, it will be an extremely attractive offering. Its cash position at the end of Q2 should be more than enough to see it through the coronavirus pandemic, given that it burns through about $7bn each quarter. Ultimately, with Fastly, the business model is great, and this belief is clearly echoed by its long list of high-profile, renowned customers. However, how far will the stock continue to rise? In the time of writing the article alone, the stock price has increased some seven per cent, with fluctuations in-between. A few weeks ago, at $81, I was sceptical whether Fastly would continue to record all-time highs with each share price movement, but on the verge of $117 right now, it’s clear that Fastly is one to watch and one that will continue to rise throughout the wider market recovery. It faces heavy competition, but its partnerships with large companies show that it is an attractive, top-level business that can add immense value to its customers. As with any investment, there are plenty of risks to be considered, and you must decide whether these risks outweigh the potential upside for Fastly?


What do you think about Fastly? Let me know in the comments below!



*Author Edit: At the time of publication, Fastly's share price has fallen to around $92. It is clear to see why - in Fastly's Q2 Earnings report, it was stated that TikTok is Fastly's single largest customer. In fact, the popular social media video platform accounted for twelve per cent of Fastly's H1 revenue. With TikTok being banned in the U.S. by Donald Trump, it poses an uncertain future for Fastly.


Disclaimer:


The Student Investor is not a registered investment, legal or tax advisor or broker/dealer. All opinions expressed by The Student Investor are from the personal research of the author, and are written for educational purposes only. Although best efforts are made to ensure that all information is accurate and up-to-date, occasionally unintended errors and misprints may occur. Please note that the value of your investment can go up or down, and The Student Investor takes no responsibility for any decisions made by readers.