Fastly (NYSE:FSLY) shareholders have had a rough year. Since October, the stock has been pummeled, falling almost 60% from its 52-week high.

It's never easy to lose money. But reacting too quickly, or for the wrong reasons, is the worst thing you can do in a situation like this. Rather than let your emotions take over, it's important to consider Fastly's long-term prospects with a level head. Let's dive in.

Worried investor standing near a window rubbing their brow, looking contemplative.

Image source: Getty Images.

Fastly's edge cloud

Fastly's edge cloud makes the internet faster and more secure. It enables clients to rapidly and reliably deliver content (i.e. websites, applications) to their own customers. This creates a high-quality experience for end users like you and me, while reducing infrastructure costs for Fastly's clients.

Why is that important? Consumers hate waiting for content to load. In fact, research from Alphabet suggests that 53% of mobile users abandon sites that don't load within three seconds. And a study from Akamai indicates that a 100-millisecond delay can cut conversion rates by 7%.

In other words, Fastly provides a critical service. That's why management values its market opportunity at $36 billion by 2022. But a big market alone doesn't make a stock worth owning. Investors should also consider how effectively a company is executing on its opportunity.

Fastly's advantage

Fastly believes it has an advantage over legacy networks like Akamai and public cloud providers like Google. Specifically, Fastly's software-centric approach makes its platform faster and more programmable, giving developers more flexibility to build unique customer experiences.

Fastly also benefits from its neutrality -- its edge cloud works with all major public clouds. That's important because more enterprises are adopting multi-cloud strategies, and Fastly's platform complements that approach. Specifically, it acts as a single location from which clients can manage and deploy resources across all other clouds. Those benefits have helped Fastly grow its customer base at a modest pace.

Metric

2018

Q1 2021

CAGR

Customers

1,582

2,270

17%

Source: Fastly SEC Filings. CAGR = compound annual growth rate.

Fastly's performance

Fastly reported revenue of $85 million in the first quarter, up 35% over the prior year. More importantly, management spoke optimistically about the future during the earnings call, noting that Fastly is well positioned to benefit from digital transformation. But Wall Street wasn't impressed, and the stock tumbled 25% after hours.

So, what happened? Investors were hoping for faster growth. Last year, the pandemic created a once-in-a-lifetime impetus for digitization, and Fastly's modest financial performance failed to meet expectations. I understand the concern here, but I still think it's an overreaction.

Fastly CEO Joshua Bixby echoed these thoughts at a recent conference, telling investors: "We didn't build [the company] to grow for a year." Bixby also noted that Fastly's revenue has accelerated each year since its IPO.

Metric

2018

2019

2020

Revenue growth

38%

39%

45%

Source: Fastly SEC Filings.

But there are still two figures investors should consider. On an annual basis, Fastly keeps 99% of its customers. And over the last 12 months, Fastly's net retention rate was 133%, indicating a 33% uptick in average customer spend. Both of those figures suggest one thing: Fastly creates value for its customers.

Is it time to sell Fastly?

I am a Fastly shareholder, and I have no plans to sell. That being said, I do plan to monitor sales and customer growth in the coming quarters. If those metrics start to trend downward, especially in the absence of any rational explanation, I would seriously consider selling.

However, I think that would be an overreaction at this point. Fastly got ahead of itself last year -- the stock was trading at nearly 48 times sales in October -- and when it failed to deliver blowout earnings, shareholders paid the price. But Fastly's long-term prospects are still intact: It has a big market opportunity, a differentiated product, and revenue is growing at a steady clip.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.