Fastly (NYSE:FSLY) is one of those companies that I haven’t paid as much attention to as I should have. Apparently, I’m an anomaly because shares of FSLY stock have gone through the roof in 2020. As of this writing, Fastly is up over 277% this year. And that gain is even larger if you jumped into the stock after the market selloff in March.
On August 6, Fastly delivered an earnings report that beat on both the top and bottom lines. But apparently the company didn’t deliver quite enough revenue for investors. And analysts are rightfully concerned about the potential (key word) loss of revenue from the company’s largest client, TikTok.
Both of those are reasons to be careful with FSLY stock. However, there are two more fundamental issues that concern me. First, the company is not yet profitable. And second, they have a gigantic competitor that is not going away.
How Is Fastly Different?
I’m curious about a number of things, but technology isn’t necessarily one of them. I want to know how something works, but not necessarily why it works. But I quickly realized that I needed to get up to speed on Fastly to fairly assess the company’s stock.
Fastly isn’t in a new sector. Content delivery networks (CDNs) are not new, but Fastly takes a different approach. The company describes it as being a part of its DNA. Fastly allows customers to make adjustments to their CDN configuration in real time. It was “designed by developers, for developers.” According to StackShare, “Fastly’s real-time content delivery network gives you total control over your content, unprecedented access to performance analytics, and the ability to instantly update content in 150 milliseconds.”
And it has drawn the attention of many of the who’s who in the tech industry, such as Shopify (NYSE:SHOP) and Amazon (NASDAQ:AMZN). Simply put, when customers order through these sites, that internet traffic is routed through a Fastly CDN. More merchants equal more traffic.
Fastly may have built a better mousetrap. But it doesn’t matter if they can’t turn that into market share. And the company faces stiff competition.
It’s Crowded on the Edge
Edge computing is a crowded field. And one of the companies that Fastly competes with is CloudFlare (NYSE:NET). But in some ways, it’s not accurate to say that Fastly competes with CloudFlare because the latter has a sizeable advantage in virtually every category. In addition to that, many companies may use more than one CDN. In fact, that’s the case with Shopify who uses both CloudFlare and Fastly.
And, CloudFlare is no slouch in terms of the company’s stock price. NET stock is up over 100% for the year.
The Company Is Not Profitable
I’m not mentioning this as if it’s a negative in and of itself. I understand Fastly is a new company in an emerging industry. It has the potential to grow into a profitable state. But analysts don’t project the company to get there for three years.
And they may be right. Although FSLY investors have enjoyed a great ride this year, one of the key catalysts may not be as strong in 2021 and beyond. Fastly was a beneficiary of companies adjusting to a work-from-anywhere environment that accelerated the move towards decentralization. In fact, Fastly counts Slack (NYSE:WORK) as one of its key accounts.
But the company also benefited from having people simply spending more time online (i.e. TikTok). And whatever 2021 looks like on the vaccine front, it’s likely that the world will be learning to live with the virus. And that may mean that they won’t be spending quite as much time making TikTok videos.
FSLY Stock May Win by Being Less Customized
Divya Premkumar wrote recently that Fastly will likely focus on its clients’ most common solutions to drive operational growth. As Premkumar theorizes that will allow them to more readily increase profit and efficiency. But it would come at the expense of the highly customized solutions that are part of its DNA.
However, doing so might allow Fastly to get to profitability before CloudFlare. And that would be a race worth winning.
Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for Investor Place since 2019. As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.