Earlier this year, you probably wouldn't have guessed that Fastly (FSLY +11.27%) was a monster stock in the making. Over a period of just 25 days between mid-February and mid-March, Fastly lost more than 50% of its value. From its bottom, however, the stock has been true to its name -- quickly roaring back and gaining more than 650%. In the process, it has become one of the best-performing stocks of 2020 (thus far).
This raises the inevitable question among investors who feel they've missed the boat. After such unprecedented gains, should investors consider adding Fastly stock to their portfolios right now, or has that ship already sailed?
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Speeding data requests at the edge
As the name implies, Fastly helps companies accelerate the speed of their internet traffic via its state-of-the-art content delivery network (CDN). The company's edge cloud platform is the result of strategically placed data centers that ensure rapid response times and timely digital delivery of customer websites, photos, videos, and more.
The company competes with several behemoths in the CDN space, most notably Akamai Technologies and Limelight Networks, but Fastly's developer-friendly network management tools and its edge computing services are helping it carve out a small but growing niche in the space.
While Fastly isn't a household name, the names that adorn its customer list are among the most recognizable businesses out there -- including Wayfair, The New York Times, and Shopify, to name just a few.
Fastly's technology platform speeds hundreds of billions of internet requests each day and has developed something of a cult following in the developer community. This shouldn't be surprising since the company was founded by developers, for developers.
Yet, as an increasing number of businesses implemented work-from-home orders to help slow the spread of the COVID-19 pandemic, investors feared that the demand for Fastly's services would come to a screeching halt, as IT departments looked to cut back on spending and hunkered down for the duration. What actually happened was very different.
Impressive quarterly results
In the first quarter, Fastly's revenue grew 38% year over year. At the same time, on a non-GAAP (adjusted) basis, the company cut its losses by about 80%. This was partially the result of a growing base of enterprise customers, which increased 22% year over year.
The company boasts an impressive customer retention rate, which clocks in at 130%. Even more impressive, however, was the fact that current customers were spending significantly more. Fastly's dollar-based net expansion rate hit 133%, showing that the average client increased spending by 33% compared to the same period last year.
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Other important considerations
As economic uncertainty is the order of the day, it's worth noting that Fastly has more than $116 million on its balance sheet and about $32 million in debt, giving the company ample resources to weather a financial storm.
It's also important to note that executive officers and directors of Fastly still own 86% of the class B shares and control about 69% of the voting power, so their interests are clearly aligned with those of ordinary shareholders.
Valuation
Due in part to its stratospheric rise over the past several months, Fastly's stock is by no means cheap. In fact, it's quite the opposite. As of Monday's close, the company's forward price-to-sales ratio has grown from low single-digits in late March to more than 30 now -- when a ratio of between one and two is considered good -- so investors have clearly baked an extraordinary amount of growth into Fastly's current share price.
To put that into perspective, analysts are expecting sales growth of 58% in the current quarter, 43% for the current year, and 28% next year -- though Fastly has exceeded expectations in each of the four quarters since its public debut.
The bottom line
Which brings us back to the pivotal investing question: "Is Fastly stock a buy?" Unfortunately, it's complicated, and as with so many things, the answer is: "It depends." Much of the answer to this question really depends on who you are as an investor.
If you're not at all interested in nosebleed-inducing valuations, have no stomach for volatility, or are looking to make a quick buck, then Fastly probably isn't the stock for you.
If, on the other hand, you have an appropriately long time horizon to let the story play out, a cast-iron constitution for the volatility that's sure to follow, and a willingness to pay up for quality, then Fastly deserves a spot in your portfolio.
