Please ensure Javascript is enabled for purposes of website accessibility

3 Things Investors Should Know Before Buying Fastly Stock

By Chris Neiger – Oct 21, 2020 at 7:15AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Investors should pay attention to Fastly's recent quarterly figures, its market potential, and the company's hurdles.

Fastly (FSLY 8.82%) stock has been on a tear this year, with shares up 317% year-to-date even after some steep price drops this month. The cloud services company's stock price has risen this year as people spent more time at home and investors went searching for companies that would benefit from a spike in internet usage.

But if you're considering investing in Fastly stock, there are at least three things you should know about the company first. 

1. The company recently cut its third-quarter estimates

On Oct. 14 Fastly released preliminary third-quarter results (it'll release the official result on Oct. 28) and they were lower than management had previously estimated. Sales in the quarter will be in the range of $70 million to $71 million, down from the previous guidance of between $73.5 million to $75.5 million.

A person holding a stack of money.

Image source: Getty Images.

Management gave two reasons for this. The first comes from "the impacts of the uncertain geopolitical environment" that resulted in a "significant reduction in revenue" from its largest customer. Fastly didn't say that the customer was social media up-and-comer TikTok, but it's widely understood that the video app is Fastly's largest customer and the "geopolitical environment" refers to President Donald Trump saying that he would ban the TikTok app from being downloaded in the U.S. 

TikTok's parent company, ByteDance, is based in China and the Trump administration says it is concerned that the app is a potential threat to national security. Oracle has since invested in TikTok and offered to run the company's services on its servers in the U.S., which has eased Trump's national security fears. But the uncertainty around TikTok's future appears to have hurt how much it uses Fastly's services, resulting in lower revenue for Fastly's third quarter. Additionally, other Fastly customers also had lower usage in the quarter, which contributed to lower-than-expected revenue as well.

It's worth mentioning that though revenue estimates for the third quarter are lower than before, they still represent a 40% year-over-year increase at the midpoint of guidance.

2. Fastly is tapping into two important markets

Most of the discussions around Fastly's business focus on the company's content delivery network (CDN) opportunities, likely because the CDN market is estimated to be worth $22 billion a year by 2024. 

But investors shouldn't overlook the company's edge computing opportunity. Edge computing allows data and information to be processed closer to the device (as opposed to only from cloud servers far away) that helps speed up online experiences, including content, ads, location-based services, and much more. 

Edge computing is still growing as a sector and could reach an estimated $15.7 billion in sales by 2025. And with an increasing amount of Internet of Things devices, edge computing will become an integral part of how these devices receive information.

Fastly already has a solid start in both the edge computing and CDN markets, but investors should keep an eye on how competitors like Akamai Technologies and Limelight Networks are tapping into these markets as well.

3. Fastly still has a couple of hurdles to overcome

As already mentioned, Fastly has several competitors and, despite the company's meteoric rise recently, Fastly doesn't currently have an economic moat protecting it. This hurdle means that while the company is growing fast and has a lot of potential to continue growing its CDN and edge computing businesses, it doesn't have a big enough lead right now to permanently keep it ahead of its competitors. 

The other hurdle is that, with TikTok's future in the U.S. still uncertain, investors should be keeping an eye on whether Fastly can continue growing revenue from its other customers and not rely too heavily on just one.

These issues don't mean that Fastly's stock isn't worth buying, but they are something investors should consider before buying shares.

Chris Neiger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Fastly. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.