Internet infrastructure companies such as Fastly (NYSE:FSLY) have enjoyed a remarkable year in terms of top-line growth. Despite a stellar second quarter, FSLY stock dropped 20.6% in the first half of August but has now recovered most of its value. A healthy 2020 outlook and the immense potential of edge computing makes FSLY stock a great bet at this stage.
The year belongs to the tech companies which investors believe are safe havens at this time. That has largely been the case for FSLY stock, which gained 344% year-to-date barring August. However, as I explain in my article, its best to look past its short-term troubles and go long with Fastly.
Stellar Operating Results
Fastly recently reported its spectacular second-quarter results. Revenues rose 62% to $75 million from the prior-year period. Additionally, the company posted a profit of 2 cents per share when Wall Street estimated a loss.
Its customer count improved 6.2%, up from 1,837 in 2019, which is the company’s best customer quarter growth so far. Moreover, average enterprise customer spend rose significantly, which improved gross margins by 6.1% from a year ago. Fastly’s September outlook comfortably exceeds analyst estimates and is expected to be in line with its March quarter results
The TikTok Issue
The US and Chinese government have been at loggerheads since the election of President Donald Trump. The latest in this on-going saga is the crackdown by the US government on Chinese short-form video app TikTok. President Trump recently announced that TikTok would be sent packing on September 15, unless an American company acquires it. Hence, investors are concerned for companies such as Fastly, which derives 12% of its revenues from the platform.
There are a couple of scenarios for Fastly’s investors to consider. The obvious one is that it loses out on its TikTok business, amounting to an estimated $17 million. Going by company claims of a market worth over $35 billion in the next two years, the lost revenues are insignificant.
The other scenario is that an American company purchases TikTok’s US operations and Fastly could retain its revenues share. Several tech giants have emerged as potential buyers, and not all of them benefit Fastly. For example, Microsoft (NASDAQ:MSFT) could buy out TikTok’s US business and move its delivery on its Azure CDN. However, if companies such as Oracle (NYSE:ORCL) or Twitter (NYSE:TWTR) buy-out TikTok, then you’d fancy Fastly to retain its business. Regardless of what happens, I expect TikTok’s impact on Fastly’s revenues to marginalize over time.
The Potential of Edge Computing and Risks
Fastly is investing heavily in its edge computing solution, which could potentially become a money-maker in the future. The technology provides a more robust experience through processing on edge rather than centralized servers. Additionally, the company is working on its developer-friendly serverless platform called Compute@Edge for its edge servers. So far, the results of its edge servers are astonishing as its servers can start up within 35 microseconds. Though it’s an evolving technology, the market is estimated to grow 336% to $15.7 billion in the next five years.
There are, however, a few risks that could weigh down Fastly’s progress. Firstly, the moderation in internet usage could significantly impact revenues once things open up completely. Additionally, revenue concentration is another problem. Of its customer base of roughly 2000 customers, only 15% are enterprise customers, which account for 88% of its revenue. Hence, any reductions in enterprise customers could have a meaningful impact on revenues.
Final Word on FSLY Stock
Fastly has a lot of positives, which many would believe justifies its lofty price. The difference between its high and low estimates is sizeable, and a forward revenue multiple of over 20, points to overvaluation. However, FSYL is a long-term investment that is worth the premium. I expect the stock to continue to rise in the coming months; therefore, it’s best to grab it now.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article
