Cloud computing stocks have held up very well during the coronavirus crisis, as enterprises across the globe accelerate their transition to remote operations and e-commerce. With more people than ever needing to access information remotely, Fastly (FSLY 0.71%) has seen demand for its content delivery network services rise dramatically.
Fastly's stock doubled in just four weeks during June and early July, and investors appear more excited than ever about the company's ability to capitalize on its edge cloud computing expertise. Yet after such a steep rise in its share price, Fastly needs for its fundamentals to catch up. Here are three things in particular that Fastly bulls want to see to justify the gains the stock has seen recently.
1. Fastly needs to use the Shopify-Walmart deal as a showcase to drive further business
In June, Shopify (SHOP 1.07%) announced that it would join forces with retail giant Walmart (WMT -1.69%) to make the latter's marketplace available to Shopify clients, adding value to Shopify subscriptions while helping Walmart grow its marketplace to compete more effectively with its rivals.
This is important for Fastly because Shopify was one of the content delivery network provider's top 10 customers even before the Walmart deal. With nearly a third of its revenue coming from those 10 largest clients, Fastly could see a big boost from its work in facilitating the increased internet traffic for Shopify and Walmart. That's especially true because of Fastly's work in e-commerce and digital payment technology. If Fastly can prove itself here, then it could appeal to other e-commerce players seeking to give their own customers a better internet experience.
2. Fastly needs to become more efficient
Fastly has grown quickly, but it's still a small company, and it's still ramping up its operations. The customized solutions that Fastly can deliver are attractive to clients, but they also cost a lot to build. As the company gets more customers, it should be able to figure out the most common solutions that its clients want and then benefit from greater scale in building those solutions out for them. That will help it reduce expenses, which in turn should make it easier for Fastly to become profitable on an operating basis.
Also important for Fastly's profitability will be efficiency with investments in marketing efforts as well as research and development. It's common for tiny businesses to spend a lot of upfront cash to come up with cutting-edge technology, but at some point, successful companies are able to fund further advances from the cash flow their businesses generate. Fastly has pledged to get there eventually, but the strong competition in the space will make it a challenge to find unfettered growth.
3. Compute@Edge needs to work out well for Fastly
Edge computing -- which refers to putting data storage and analytical tools closer to where companies collect and use key information -- has come into vogue recently. Decentralizing data storage is especially important in real-time applications, where even microsecond latencies can significantly degrade app performance.
Fastly has been doing a private beta test for its Compute@Edge edge computing environment, which forgoes more traditional dedicated private data servers in favor of on-demand cloud resources for which clients get charged on a usage basis. The company claims start-up times that are 100 times faster than other available solutions.
There are plenty of other companies taking advantage of demand for edge computing platforms, so Fastly has a lot riding on Compute@Edge. New CEO Josh Bixby is excited about the number of Fastly clients who are trying out Compute@Edge. That makes it more critical, though, for Fastly to deliver a strong experience.
Turning quick gains into lasting growth
The temptation to take a quick profit on a hot stock can be overwhelming, and Fastly's stock has certainly been a winner for those who took advantage of share-price weakness during the winter and early spring. Going forward, investors will want to see Fastly make good on its potential. These three things would go a long way toward proving Fastly's worthiness to be a budding leader in a fast-growing tech-stock niche.