Fastly (NYSE:FSLY), which operates a cloud-based infrastructure platform, got off to a very fast start when the company pulled off its IPO in mid-May. On the first day of trading, the shares soared by nearly 50%. And since then, Fastly stock has logged a return of about 336%. The market capitalization is now at $7.9 billion.
But the bull move has not been a straight line. Keep in mind that Fastly stock is actually 42% off its all-time high. In fact, since June the shares have essentially treaded water.
So what now for Fastly stock? Could the stall in the stock price be an ominous sign? Or is now an opportunity to jump in? Well, let’s take a look.
A Backgrounder
In 2011, Artur Bergman founded Fastly because he saw an opportunity to significantly improve content delivery systems (CDN) for the Internet. Before this, he was the chief technology officer at Wikia and managed the engineering team at LiveJournal.
Bergman served as CEO of Fastly until February of 2020. Then he brought on Joshua Bixby to take on this role as the company geared up for the IPO. Before joining Fastly, Bixby was the vice president of acceleration at Radware (NASDAQ:RDWR) and the co-founder of Strangeloop Networks.
At the core of Fastly is technology that allows companies to operate sophisticated websites and apps that have massive amounts of traffic. This type of service is certainly in high demand. After all, the expectations of Internet users is quite high as they have become accustomed to great experiences from companies like Uber (NYSE:UBER), Airbnb and Amazon (NASDAQ:AMZN). So with Fastly, it’s possible for companies to compete at this level.
For the most part, Fastly technology is trailblazing an emerging category called Infrastructure as a Service (IaaS). This means providing tools that allow developers to build, secure and deliver rich digital experiences.
One key advantage to Fastly is that it is completely in the cloud. There is no need to invest in expensive and complicated hardware appliances, such as application delivery controllers and web application firewalls. Next, Fastly takes advantage of edge computing. In other words, the key systems are close to the end-user, which helps to boost the speed and performance.
The scale of the Fastly platform is definitely enormous as well. It currently handles about 800 billion request per day and there is the delivery of 420 billion images per month.
And yes, the market opportunity is quite large. According to the company’s own analysis, the estimate is that the spending will go from $23.1 billion in 2019 to $35.4 billion by 2022.
The Issues
The main reason for the downward pressure on Fastly stock was the latest earnings report. True, on the face of it, the results looked good. The revenues jumped by 42% and there were nice improvements in gross margins.
But Wall Street wanted even more. Even a slight miss for a momentum stock can result in big losses.
It’s important to note that Fastly’s business model relies on usage. Even though this is attractive to customers, it can result in volatility. So in the latest quarter, the revenues came under pressure because there was less overall activity — and a big part of this was from the company’s largest customer TikTok (the customer represents roughly 10.8% of total revenues). The company had moved away from Fastly as it was under pressure from the Trump Administration because of concerns regarding the privacy of data. The fear was that it may be used by the Chinese government.
But it is not clear how this may ultimately play out. For example, there is buzz that TikTok is building its own alternative to TikTok.
Bottom Line On Fastly Stock
Regardless of the TikTok situation, Fastly is likely to keep growing at a fast pace. Again, the market is large and the company has a standout platform. In the latest quarter, it there were 313 new customer additions, up from 304 in the prior quarter. The average enterprise customer spend rose from $716,000 to $753,000 during this period.
There should also be a nice boost from the Signal acquisition. It looks like there will be upsell and cross-sell opportunities for the company’s security offerings.
And finally, there are major long-term forces that should continue to drive the growth as companies need to focus more on their digital transformation.
So while there will be continued volatility, it seems reasonable that investors can still get some nice gains from Fastly stock.
On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Tom Taulli (@ttaulli) is an advisor/board member for startups and author of various books and online courses about technology, including Artificial Intelligence Basics, The Robotic Process Automation Handbook and Learn Python Super Fast. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s.
