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Down as Much as 20% Since Its IPO, Is Fastly a Buy?

By Nicholas Rossolillo - Jun 11, 2019 at 4:00PM

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Demands on the internet infrastructure are rising, and this edge cloud computing company is positioned to help.

The way we use the internet is undergoing change -- and fast. Surfing the web has given way to streaming video on the web, and data-intensive applications for daily life and for work have proliferated. At the same time, we as consumers have become more needy, demanding faster response times even as the applications we use grow more complex.

That is a tall order for businesses to fill, but Fastly (FSLY -1.57%) is here to help. The edge cloud software company was built to help companies deliver faster web experiences and is going like gangbusters. After Fastly successfully went public on May 17, share prices have dipped as much as 23.5% and are currently down about 11% from their high point. For those willing to accept a wild ride, this could be one worth paying attention to.

Meeting demand for edge cloud computing

Cloud computing has been one of the more successful business and investment stories of the last few years. Data centers have been popping up all everywhere to provide greater speeds and to take over local computing power -- to warm reception from the consumer. The edge cloud is the next iteration of that movement, with smaller data centers extending the reach of the internet and pushing the source of cloud computing closer to the end user.

Fastly is becoming part of that solution with its infrastructure-as-a-service (IaaS) platform. For Fastly, IaaS means providing a software-defined network to move the source of data delivery closer to users, security services, and a toolbox for developers to build new digital applications for customers. It's not a sexy business with a slick website or service the average internet user can check out, but it does a lot of behind-the-scenes heavy lifting and powers a multitude of sites and apps that we use daily.

A picture of a cloud -- illustrating a data center -- with a bank of computers connected to it.

Image source: Getty Images.

Fastly is small, but not for long

Fastly boasts having all sorts of name brand customers -- from Booking Holdings' travel metasearch site KAYAK to food ordering and delivery platform Grubhub to music streaming service Spotify Technology. Whether a client is a new business built for the digital world or an old business trying to make the transition to a more modern operation, Fastly thinks it can help. About a third of the company's revenue comes from its top 10 customers, but those existing customers are continuously spending more over time. This is evident in Fastly's dollar-based net expansion rate of 132% in 2018 and 130% in the first quarter of 2019, implying existing customers are spending over 30% more than a year ago.

The results are impressive. After a 38% increase in revenues in 2018 and net losses narrowing to $30.9 million compared to losses of $32.5 million in 2017, Fastly's double-digit growth continued in the first quarter of the new year, with gross profit getting a big bump in the process.

Metric

Q1 2018

Q1 2019

Change (YOY)

Revenue

$32.5 million

$45.6 million

40%

Gross profit margin

52.7%

56.7%

4.0 p.p.

Operating expenses

$26.0 million

$33.9 million

30%

Earnings (loss) per share

($0.39)

($0.38)

N/A

YOY = year over year. p.p. = percentage point. Data source: Fastly.

High-growth business has a wild ride ahead

Since the company is running at a loss with no view on when that may end, it's difficult to value Fastly at this point. Gross profit margin is on the rise as revenues increase -- a good sign that indicates the company can still gain profitable scale as it gets bigger. However, 56.7% gross margin in the first quarter isn't particularly high for a software company. That could change, but there's limited insight on the company's performance at this point. The limited operating history and outlook explain some of the wild movements in the stock since its public offering. Going forward, it will all depend on the company's ability to deliver fast and secure web experiences to customers and its ability to pick up new ones along the way.

Nevertheless, Fastly is showing some early signs of promise as demands on the internet continue to increase and businesses turn to the edge cloud outfit for help. For investors comfortable with a high-growth business with a healthy dash of uncertainty, Fastly is worth following.

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