Fastly's (FSLY -2.14%) stock was cut in half this year after the company missed analysts' expectations for two straight quarters. A service outage in June also tarnished the cloud service provider's reputation, resulted in the loss of a top-10 customer, and caused delays for upcoming projects. As a result, Fastly expects its revenue to rise just 17%-20% this year, compared to its 45% growth in 2020, and it could fall further behind its competitors in the content distribution network (CDN) and edge computing markets.

Fastly's stock still isn't cheap at 13 times this year's sales, and it could struggle to justify that high price-to-sales ratio if it doesn't stabilize its core business soon. Fastly isn't doomed yet, but investors should seriously consider investing in its rivals Cloudflare (NET 0.12%) and Akamai (AKAM -1.71%) instead.

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1. Cloudflare: Stronger growth at a higher valuation

Cloudflare is the world's top CDN provider in terms of total customers. It serves data from 200 cities in over 100 countries, and it processes an average of 25 million HTTP requests every second. Its CDN accelerates the delivery of images, videos, and other content on websites, its domain name server (DNS) service links websites to IP addresses, and its cybersecurity services prevent hackers from knocking websites offline with DDoS (distributed denial-of-service) attacks.

Cloudflare's revenue rose 50% to $431 million in 2020, and it expects 46%-48% growth this year. It maintained that outlook even after suffering a minor service outage in June, which was far less serious than Fastly's outage and didn't spark an exodus of major customers.

Cloudflare ended the second quarter of 2021 with 1,088 large customers (which generate over $100,000 in annualized revenue each), up from 828 at the end of 2020 and 526 in 2019. It now generates over half its revenue from those large enterprise customers, and it ended last quarter with an impressive dollar-based net retention rate of 124% -- compared to 115% a year earlier.

Cloudflare isn't profitable yet, and its stock is undeniably pricey at 60 times this year's sales. However, I believe it makes more sense to pay a premium for a market leader with superior growth rates than settle for Fastly, which is generating slower growth from a much smaller slice of the CDN market.

2. Akamai: Slower growth at a more reasonable valuation

Investors who think Cloudflare is too expensive should consider buying Akamai. Akamai is firmly profitable by GAAP and non-GAAP measures, and its stock trades at 19 times forward earnings and less than six times this year's sales.

Like Cloudflare, Akamai offers CDN, DNS, and cybersecurity services for websites. Its core platform for edge networks, the Akamai Intelligent Edge Platform, serves data in 947 cities and 135 countries. Akamai serves fewer CDN customers than Cloudflare, but it serves much larger enterprise customers, which makes it the market leader in terms of annual revenue.

Akamai's revenue rose 11% to $3.2 billion in 2020, led by the 25% growth of its cloud security solutions division, which generated over $1 billion in revenue for the full year, as its adjusted EPS rose 8%. This year, it expects its revenue and adjusted EPS to both rise about 7% at the midpoint.

Akamai's CDN business faces a near-term slowdown, partly due to a tough comparison to the pandemic last year and a ban on Chinese apps that use its services in India. However, it expects the growth of its cloud security and edge computing services segments to partly offset those challenges.

Akamai is growing slower than Fastly, but it's much larger, has a more established reputation in the CDN market, and is consistently profitable. Its stock is also much cheaper, and its lower valuations should limit its downside potential if a market crash takes down Fastly and Cloudflare.

The bottom line

The CDN market could still grow at a CAGR of 27.3% between 2021 and 2026, according to Mordor Intelligence, as more companies optimize and secure their websites to handle more traffic. Therefore, there could be plenty of room for Fastly, Cloudflare, Akamai, and other CDN companies to grow without trampling each other. 

Unfortunately, Fastly is neither a great growth nor value play on this expanding market. It makes more sense to buy Cloudflare for its growth or Akamai for its value than to wait for Fastly to get its act together.