Fastly (FSLY -3.35%) posted its fourth-quarter earnings report on Feb. 15. The content delivery network (CDN) provider's revenue rose 22% year over year to $119.3 million and beat analysts' expectations by $4.8 million. Its adjusted net loss narrowed from $11.7 million to $9.5 million, or $0.08 per share, which also cleared the consensus forecast by a nickel.
For the full year, Fastly's revenue rose 22% to $432.7 million, which matched its 22% growth in 2021, but its adjusted net loss widened from $55.9 million to $72.3 million. Fastly's headline numbers weren't perfect, but its stock was already cut in half over the past 12 months. Let's review the bear and bull cases to see if it could be a turnaround play this year.
Image source: Getty Images.
What the bears will tell you about Fastly
Fastly's CDN accelerates the delivery of images, videos, and other digital content for websites by storing their cached copies on its "edge" servers, which are located closer to the visitor than the "origin" servers. It also shields websites from bot-driven cyberattacks. The market's demand for these services has soared in recent years as companies launch more media-intensive websites to capitalize on higher internet speeds.
The bears will tell you to invest in Cloudflare (NET -1.05%) instead of Fastly to profit from the growth of that market. Cloudflare provides similar services, but it's larger, growing faster, and has higher gross margins.
Cloudflare's revenue rose 52% in 2021 and 49% in 2022, and it expects 36%-38% growth to $1.33-$1.34 billion in 2023. Fastly expects its revenue to rise 14%-17% to $495-$500 million this year. Fastly's adjusted gross margin fell from 52.9% in 2021 to 48.5% in 2022, while Cloudflare's adjusted gross margin only dipped from 78.6% to 78.2%.
Cloudflare's free cash flow (FCF) also improved from negative $43 million in 2021 to $40 million in 2022, and it expects that metric to turn positive in 2023. Fastly's FCF worsened from negative $100 million in 2021 to $172 million in 2022.
What the bulls will tell you about Fastly
The bulls will point out that even though Cloudflare is growing faster, it isn't cheap and trades at 15 times this year's sales. Fastly trades at just 3 times this year's sales, so it might have more upside potential than Cloudflare if higher interest rates continue to squeeze pricier growth stocks. Fastly's low enterprise value of $1.5 billion and reasonable debt-to-equity ratio of 0.99 might also make it a compelling takeover target for larger and slower-growth CDN players like Akamai.
Fastly's trailing 12-month net retention rate, which tracks its year-over-year revenue growth per existing customer, also rose to 119% in the fourth quarter -- compared to 118% in both its previous and prior year quarters. That improvement might seem minor, but Cloudflare's comparable dollar-based net retention rate dropped to 122% in the fourth quarter -- compared to 124% in the previous quarter and 125% a year earlier.
Fastly's rising retention rate, which it attributes to higher spending among its larger enterprise customers, suggests it won't be rendered obsolete by Cloudflare anytime soon. It also expects its adjusted net loss per share to narrow from $0.59 in 2022 to $0.21-$0.27 in 2023 as it reduces its infrastructure costs and other operating expenses.
Lastly, the global CDN market could still grow at a compound annual growth rate (CAGR) of 23% from 2022 to 2030, according to Grand View Research. Therefore, there could still be plenty of room for Fastly, Cloudflare, Akamai, and other CDN service providers to flourish without trampling each other.
Which argument makes more sense?
Fastly looks a lot better than it did a year ago when it was still reeling from a system outage in mid-2021 and the resignation of its CEO Joshua Bixby. Todd Nightingale, who took the helm last September, seems to have stabilized Fastly's revenue, reined in its spending, and avoided more disastrous outages. However, Fastly stock still can't be considered a screaming bargain yet. Therefore, I expect Fastly's stock to hold steady this year, but I don't expect it outperform the market -- especially when there are plenty of better choices for both value-oriented and growth-oriented tech investors.
