Fastly Forecasts a Slowdown in 2021, but Edge Computing Is Just Getting Started

The past six months have been full of speed bumps for Fastly (FSLY -3.78%). An initial surge in internet traffic at the beginning of the pandemic gave way to concerns over the company losing (though perhaps only temporarily) its biggest customer, TikTok. But the final quarter of 2020 ended up being pretty good, all things considered. And despite a sluggish-looking initial outlook for 2021, the long-term potential for this edge computing leader is still promising.

2020 set a high bar

Fastly's revenue in the final quarter of 2020 increased 40% from the year-ago period to $82.6 million, including a $2 million deferred revenue writedown associated with its recent acquisition of security software vendor Signal Sciences. Fastly also inched its way closer to breakeven, as growing use of its edge computing-based content delivery network (or CDN, the infrastructure on which data travels on the internet) allows the company to operate at a more efficient scale. Adjusted gross profit margin on services rendered was 63.7% in the fourth quarter, a big jump from just 57.6% during the same period in 2019.

In total, 2020 was a pretty good year for the upstart CDN outfit as a surge in internet use during the pandemic helped it pick up plenty of new customers.

Data source: Fastly. pp = percentage point.  

Other highlights in Q4: The dollar-based net expansion rate increased 143%, implying existing customers spent 43% more with Fastly than the previous year. Total customer count was 2,084 compared to 2,047 in Q3, including an enterprise customer total of 324 (up from 313 three months ago). For now, Signal Sciences' customer count is being reported separately from Fastly's. Its total count was 280 at the end of the year, including 78 enterprise-level customers. Management said there was approximately 25% overlap with existing Fastly enterprise customers. 

Image source: Getty Images.

The company has a lot going for it

In spite of the solid conclusion to the year and promising potential for Signal Sciences due to cloud-based cybersecurity being a high priority in this new digital era, Fastly shares fell double-digit percentages following the recent report's release. The problem was with the 2021 outlook.

Fastly trades for a hefty 32 times trailing 12-month sales, a premium that implies its fast expansion will continue for the indefinite future, especially since the firm isn't yet profitable. So any slowdown in expected business trajectory isn't great news. 

Specifically, management is calling for full-year 2021 revenue of $375 million to $385 million. At the midpoint, that equates to a respectable 31% increase. However, given the acquisition of Signal Sciences, it does imply a sharp slowdown in organic growth. It isn't the end of the world, though, and not just because management could be striking a cautious stance on its full-year outlook. 

2020's financials set a high bar, especially at the start of the pandemic when internet use surged higher as many people went into lockdown. Revenue was up 62% year-over-year to $75 million for the quarter ended in June. That surge in traffic has since moderated. If Fastly reports double-digit growth over and above that in Q2 this year, I say it's a win. 

It's also important to remember that edge computing (decentralizing data and services away from a centralized cloud provider and moving it closer to the end user) is still in its infancy. Fastly said it is still seeing its customers use its network in new ways, including in online multiplayer gaming, video-streaming, e-commerce, and cloud application security.

This is still a small company, and it holds lots of future promise. And even after the acquisition, it has a clean balance sheet, with $193 million in cash and equivalents and zero debt. I'm not suggesting that investors back up the truck and buy as much Fastly stock as they can after the Q4 2020 update. However, the situation is far from dire. This next-gen internet infrastructure business is doing just fine, and deserves to remain on growth investors' watch lists.