Fastly's (FSLY +1.30%) edge cloud platform makes the internet faster by moving content and computing to the network edge (closer to where data is generated). The tech company's stock was up 335% in 2020, but Fastly still has room to run. In the next five years, as more devices connect to the internet, creating exponential amounts of data around the world, Fastly's platform should become increasingly necessary in delivering fast, secure digital content. Here's why Fastly looks like a smart long-term investment.
Fastly's edge cloud platform
Fastly's data centers are strategically located in close proximity to users, making its edge cloud platform very good at two things: content delivery and edge computing. Fastly's content delivery network, or CDN, enables enterprises to deliver content like websites or streaming media from Fastly's servers, rather than their own. And Fastly's edge computing platform takes this a step further, actually processing data at the edge. This means developers can build applications on Fastly's edge servers, and those applications can rapidly process time-dependent data created by IoT sensors or other devices. In both cases, Fastly improves the experience for users (or devices) by reducing lag time, while also reducing infrastructure costs, increasing scalability, and improving security for its customers.
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Between these two use cases, management estimates Fastly's market opportunity will reach $35 billion by 2022. That's 131 times the company's trailing-12-month revenue of $267 million, which means Fastly still has plenty of room to grow. But that's just the beginning – this tech company's opportunity could get so much bigger.
The next five years
Over the next five years, e-commerce, streaming media, social media, and digital payments are likely to be defining trends, and Fastly's platform helps customers in each industry. For example, e-commerce enablers like Shopify and Etsy use Fastly to help personalize the shopping experience for customers, which improves conversion rates. Fastly also helps digital payments providers like Stripe by reducing checkout times and enhancing security. Similarly, social media platforms like Pinterest and streaming content providers like Spotify use Fastly to reduce lag time and provide a reliable digital experience for consumers. And Fastly's role in enabling these trends should continue to drive customer and revenue growth in the coming years.
Likewise, artificial intelligence will become increasingly important over the next five years. In fact, CEO Joshua Bixby recently indicated that more customers are using Fastly's platform to help artificial intelligences learn from and interpret large amounts of data. Fastly's role in enabling AI and data processing at the edge should help support the growing internet of things, or the IoT for short, and the expanding number of connected devices.
By 2025, IBM estimates that the number of IoT devices will reach 75 billion, up from 31 billion in 2020, bringing the total number of connected devices worldwide to 150 billion. IoT sensors will monitor connected vehicles, industrial machines, smart cities, and smart factories; autonomous robots will work in agriculture, logistics, and medicine; technologies like augmented reality and virtual reality will become more prevalent.
All of these things will create an enormous amount of data -- so much data that it would take too long and cost too much to send it back to a central cloud. That's why research firm Gardner estimates that 75% of data will be processed at the edge by 2025 -- a huge increase from 10% in 2018. This trend should be another powerful growth driver for Fastly's business.
Fastly's competitive edge
Compared to legacy CDN providers like Akamai (AKAM +2.09%), Fastly's platform has two significant advantages: It's faster and more efficient. Fastly operates fewer clusters of more powerful servers, meaning it has less infrastructure to maintain. But Fastly's strategic network design and proprietary software make its platform faster. This means Fastly's customers can update their content or application code at the edge almost instantly, a process that takes up to an hour for legacy providers. This speed also means Fastly's platform can deliver rapidly changing content, such as store inventory, hotel availability, or breaking news. Legacy providers can't.
Cloudflare (NET +0.14%) is a more significant competitor, since its network is built with fewer data centers and more powerful servers than traditional providers. Cloudflare also generates more revenue and has a larger customer base, but Fastly still has an edge. Fastly's platform is designed for large enterprises, while Cloudflare focuses on smaller customers. As a result, Fastly's platform offers more enterprise-grade features and programmability, which results in better performance. That advantage should help Fastly continue to grow despite intense competition.
A final word
Investors should pay attention to Fastly's ability to add new customers, particularly enterprise customers (those spending more than $100,000 per year). Fastly is still not profitable, and if customer growth slows, the company may never achieve profitability. Investors should also be aware that Fastly is currently free cash flow-negative, though the company did post positive cash from operations for the first time in its most recent quarter.
So if everything goes right, where will Fastly be in five years? It's impossible to predict the future, but Fastly has a solid competitive position, and its edge cloud platform helps enterprises save money, scale quickly, improve security, and deliver high-quality digital experiences to customers. As the world becomes increasingly digitized, those services should become increasingly relevant. From that perspective, Fastly's future looks bright.
