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Here's What Makes Fastly a Top Edge Computing Stock

By Kyle Salvitti - Feb 4, 2021 at 11:44AM

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The content delivery network's laser focus on edge computing is already paying off.

Fastly (FSLY -9.62%) and its edge computing platform help companies process and deliver information over the internet. Even though edge computing is in its infancy, Fastly is quickly emerging as a category leader as it continues to provide better, more innovative products for programmers than its competitors. 

A woman works in a data center, surrounded by racks full of computers.

Image source: Getty Images.

How does edge computing work??

CDNs, or content delivery networks, are essentially a web of small computers, or servers, that link together to collaborate as a single computer. CDNs try to improve the performance of internet-connected devices by placing these servers as close as possible to the people using those devices, in many different locations, creating hundreds of points of presence -- otherwise known as POPs. Think of them like hotspots – the closer someone is to a hotspot, the better their Wi-Fi will work.

Prior to CDNs, when a person attempted to load a web page, their computer or phone would send that request to a central data server thousands of miles away. CDNs allow those same web pages to load much faster because the user is physically closer to the data server.

Typically, these requests involved retrieving static data like images. But  Fastly is taking this technology even further by moving all application processing closer to the end user, also referred to as "the edge", while giving developers more control in building programs.

Why Fastly?

Compared to previous CDNs, Fastly runs larger, more powerful data servers with more strategically located POPs. Larger servers allow more advanced computing to occur as close to end users as possible. 

While the larger POPs and more powerful servers are a must, Fastly's real advantage comes from its status as the only CDN built from the ground up for developers to build and innovate at the edge. This makes its platform much more developer-friendly than competitors by offering far more services others don't or can't – like providing extensive documentation and tutorials for developers, as well as ready-to-use code for common uses that programmers can implement into their own applications. These simple services put the programmers in total control of their application and make their lives easier. 

To highlight this, Naren Venkataraman, the director of Video Encoding at Vimeo, attests:  "Fastly is very easy to configure, and was so simple to set up. It's a do-it-yourself CDN." Vimeo requires tools that are easy to use, offering programmers total control and instant responses when changes need to be made. Because Fastly gives them complete access to its developer tools and configurations, Vimeo can deploy new services quickly and make changes promptly without any lag time. 

Nevertheless, there's likely room for more than one winner in this fast-growing and changing market. Investors don't need to get too hung up on predicting whether Fastly will come out as the sole victor. The company just needs to continue to execute on its value proposition it has already built, earning itself an outsized portion of this promising market opportunity.edge computing is not a winner-take-all market. this is not a zero-sum game, so this is less a story about which edge computing company will win. Even though there is room for a few winners to emerge, The market is estimated by Fastly at over $35 billion, and as Fastly continues to focus and innovate with programmers in mind, companies will choose to work with it as one of the a a top players in this space.

Another advantage Fastly has over rivals, such as Cloudflare (NET -11.01%), is the sheer speed at which its servers process data. Its servers reportedly have a start-up time of 35 microseconds -- 100 times faster than the 3-5 milliseconds Cloudflare's servers take to start up. This may sound negligible, but scaled over many requests, this difference adds up very quickly. And with the ongoing rollout of 5G, end users may start demanding even faster experiences, making Fastly's speed even more of a competitive advantage.

Fastly makes its customers pay based on how often they use its services. If the company can better support programmers, they'll use its data servers more, boosting the company's revenue. Fastly's improvements to traditional CDNs have massive implications moving forward as more devices become connected to the internet and more companies use its services.

Proof: pleased and innovative customers

Based on one crucial metric, customers seem to love Fastly. The company's dollar-based net expansion rate measures how much more money existing customers spend on its services, on average, from one year to the next. In Q3 2020, that figure grew to 147%, up from 137% in the second quarter. Like a repeat consumer shopping at their favorite store, Fastly's customers keep coming back -- and in Q3 2020, they spent 47% more than they did in Q3 2019. 

Fastly has especially been gaining a lot of traction with enterprise customers. In the third quarter of 2020, the company's revenue grew 42%, with its average enterprise customer (defined as a company spending $100,000 or more in 12 months) spending an average of $753,000 -- up from $716,000 in Q2. 

There are already a lot of large, innovative businesses increasing their usage of Fastly's services, and that list is likely to continue to grow as more programmers take advantage of Fastly's programmer tools for new and bigger projects. E-commerce giant Amazon.com currently uses Fastly servers to load and update their homepage. Other e-commerce customers include Shopify and Dollar Shave Club, while fintech customers like Stripe rely on Fastly to run its business. In addition, videos from FuboTV and Vimeo depend on Fastly's edge computing.

Growth opportunities

Use cases are only increasing for edge cloud computing, making Fastly's innovations more critical. The Internet of Things is expanding rapidly as more devices get connected. Augmented reality, e-sports, and security solutions are all examples of growing markets that require large amounts of computing power and data and will rely on edge computing in order to run without delays. As more new markets develop, such as self-driving cars, the use cases for technology like Fastly's will only increase in importance. New technologies require quick decision-making and processing to function as intended, and Fastly is positioned to benefit from edge computing's massive adoption.

While the company is currently not profitable, it is likely to continue to scale and grow into a high-quality business in the long term. Even after its shares' impressive run-up from the low $20's in 2020, Fastly's bright future makes it a worthy investment to consider at the current price.


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Stocks Mentioned

Fastly, Inc. Stock Quote
Fastly, Inc.
FSLY
$10.71 (-9.62%) $-1.14
Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$2,082.00 (-3.21%) $-69.14
Shopify Inc. Stock Quote
Shopify Inc.
SHOP
$324.84 (-11.85%) $-43.65
Cloudflare, Inc. Stock Quote
Cloudflare, Inc.
NET
$50.50 (-11.01%) $-6.25
fuboTV, Inc. Stock Quote
fuboTV, Inc.
FUBO
$2.99 (-7.43%) $0.24

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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