Shopify (NYSE:SHOP) is on a roll. Just weeks after announcing a deal to help power the back-office needs of Facebook's (NASDAQ:FB) new Shops platform, the e-commerce management provider has now inked a deal with Walmart (NYSE:WMT). Merchants utilizing Shopify's platform can now integrate their businesses with Walmart Marketplace, a site catering to third parties looking to sell online. Per Walmart's press release:
The [Walmart] U.S. eCommerce business grew 74% in total last quarter, and growth in marketplace outpaced the overall business even as first-party sales were strong. As we launch this integration with Shopify, we are focused on U.S.-based small and medium businesses whose assortment complements ours and have a track record of exceeding customers' expectations.
For big-box store juggernaut Walmart and e-commerce leader Amazon -- the target of Walmart's move here -- the news is little more than a shoulder shrug. It's just another shot fired in the battle for the future of retail. For Shopify, however, it's a bigger deal, as it's becoming increasingly clear the future of retail favors smaller businesses and ample choice for consumers. Retailing and merchandising are becoming outlets for entrepreneurship again -- as they should have been all along.
In response, Shopify's stock raced 8.5% higher on the day of the news, a significant increase given Shopify's market cap is approaching $100 billion. But there was a far smaller business that could benefit from the Walmart/Shopify agreement even more: Fastly (NYSE:FSLY). It might appear random, but the 11% run higher in this small technologist's shares the day of Shopify and Walmart's announcement was no coincidence.
A new era of directing web traffic
So far, 2020 is shaping up to be a banner year for the interwebs. Confined to home due to shelter-in-place and work-from-home orders because of you-know-what, households have been forced to rely on the internet for just about everything -- at least during peak lockdown. That has meant a bump in traffic for content delivery networks (CDNs), the companies responsible for making sure data travels across the internet and arrives at its intended destination.
For legacy CDNs like Akamai, it remains to be seen how much of the extra traffic and resulting revenue will stick. But for cloud computing-native upstarts like Fastly and Cloudflare (NYSE:NET), a world increasingly favoring digital business (especially delivered via the cloud) has been an opportunity to sop up some market share.
Fastly has ample competition, but it has carved out a niche in e-commerce and digital payment technology. After growing its revenue 39% in 2019, the momentum continued in Q1 2020 with a 38% increase to $62.9 million. While it initially looked like heavy reliance on e-commerce would be a negative at the outset of the current crisis, it's become clear that digital buying and selling just got a shot in the arm like never before. After the new Shopify/Walmart news, Fastly is up 160% so far 2020.
Hitching up to the right wagon
To be fair, Fastly stock's run is now pricing in quite a bit of future expansion. And it's still unclear just how much results will accelerate -- if at all -- for the rest of 2020. However, what is clear is that Fastly has hitched itself to a superstar in Shopify.
Fastly reported earning 88% of its revenue in Q1 from just 297 enterprise customers (up from 288 at the end of 2019). But the company reported in its 2019 annual report that nearly a third of its revenue comes from its top-10 customers. One of those customers specifically named was Shopify. Besides adding new customers, Fastly's growth relies heavily on key partnerships like with Shopify continuing to expand.
E-commerce has lent a helping hand. In its Q1 2020 letter to shareholders, Fastly said it expanded its relationship "with one of the world's largest e-commerce platforms" -- this could have been Shopify, or also Adobe and its Magento e-commerce management subsidiary. No matter who it is, though, Fastly is emerging as an internet infrastructure company benefiting greatly from the surge in digital purchasing. Shopify inking a new contract with the world's largest retailer means Fastly could by extension get access to some of Walmart's web traffic (via Marketplace), just like potentially handling some Facebook traffic (via Shops) was a big deal a few weeks ago.
Long story short, there are multiple ways to play the booming e-commerce industry, but small CDN Fastly could be one of the biggest long-term winners. Though shares are up triple-digit percentages this year, it's still a small outfit at just over $5 billion in market cap. If you haven't already, I recommend at least keeping an eye on this fast-growing technologist.