In contrast with previous challenging quarters, Fastly (FSLY -4.87%) posted encouraging third-quarter results. Indeed, following the content delivery network specialist's global outage in June, top customers are returning traffic to the platform. And the company is making progress with its growth initiatives in the cybersecurity and edge computing areas.
Management announced an ambitious goal of generating $1 billion in revenue by 2025. Let's see what that means for investors.
Volatile short-term results
Fastly's core business consists of accelerating access to online services by hosting content closer to users, thanks to its data centers in 31 countries. More recently, it developed an edge computing offering to allow developers to build dynamic services on its decentralized servers.
Last year, coronavirus-induced stay-at-home orders boosted the company's business as people relied on performant internet services for work and entertainment. And more importantly, the digitization of enterprises represents a secular tailwind for the company.
However, Fastly recently faced important challenges that offset its positive momentum. In 2020, its then-largest customer, the social network TikTok, significantly reduced business with Fastly because of geopolitical tensions. And in June, a global outage led some top customers to direct their traffic to competitors. As a result, Fastly's revenue growth has been decelerating over the last several quarters.
Fortunately for the company, the third-quarter results show operations are improving, thanks to strength across cybersecurity and edge computing activities. Revenue grew 23% year over year to $87 million. And management anticipates full-year revenue to land in the range of $347 million to $350 million, up 19% year over year at the midpoint.
Ambitious goal amid strong competition
Management expressed confidence in growing the company's revenue to the symbolic $1 billion mark by 2025, which corresponds to a strong top-line compound annual growth rate (CAGR) of approximately 30% during that time frame.
To that end, the company will push the growth of its edge computing platform by proposing trial versions and free offerings. The results of such an initiative remain to be seen, as the company will face tough competition from its innovative high-growth peer Cloudflare (NET -6.10%). The research outfit Forrester Research ranked Cloudflare's edge computing platform ahead of Fastly's from the strategy and offering perspectives. Fastly's edge computing platform remained better ranked than Microsoft's, Amazon's, and Akamai Technologies', but the comparison isn't exactly fair -- those larger players can leverage their superior scale and cross-selling opportunities to market their edge computing solutions.
Similarly, management aims to boost Fastly's cybersecurity segment, with the goal of multiplying revenue by 10 to approximately $400 million in 2025, which corresponds to an impressive CAGR of 78%.
Of course, the company will capitalize on the secular shift of enterprise infrastructures and applications to the cloud to propose its cybersecurity services. But again, it will be facing strong competition in the crowded cybersecurity area. For instance, the IT research specialist Gartner positioned Fastly as a challenger in its magic quadrant for web application and API protection (protecting online services against external threats) in terms of ability to execute and completeness of vision, behind competitors Akamai, Cloudflare, and Imperva.
Priced for success
So with Fastly stock trading at 18.2 times and 6.3 times the anticipated revenue in 2021 and 2025, respectively, the market seems to be pricing in strong execution toward management's ambitious long-term goals amid strong competition.
However, the company has yet to enhance its edge computing and cybersecurity offerings to lead in these categories. In addition, profitability seems far away. Net losses more than doubled to $56 million during the third quarter compared to a loss of $24 million in the prior-year quarter because of increased investments in research and development as well as sales and marketing to fuel growth.
Thus, investors should remain prudent. Even if Fastly manages to grow its revenue to $1 billion by 2025, stock price upside potential will depend on flawless execution beyond that goal.