At first glance, Fastly (FSLY 4.43%) looks like a company in a prime position to capitalize on artificial intelligence (AI). Content delivery network (CDN) companies like Fastly provide the critical edge computing services needed to help run applications with minimal latency.
Unfortunately for Fastly investors, the edge computing stock continues to underperform the indexes and shows no signs of recovering to levels it reached in the 2021 bull market. Does this make Fastly a stock to avoid, or is it on the cusp of reaching its potential as a cloud and AI investment?
The opportunity in Fastly
Given its positives and negatives, investors may struggle to make sense of Fastly stock. Edge computing companies like Fastly operate data centers throughout the world. This means that no matter where one is located, an available server is nearby.
The proximity that edge computing brings allows applications to run quickly, facilitating the AI applications that are becoming increasingly critical to the world's technology infrastructure. To achieve such speeds, Fastly operates approximately 80 data centers worldwide.
That presence places Fastly in the middle of a potentially lucrative growth trend. Grand View Research forecasts a compound annual growth rate of 36.8% for the edge computing market through 2030.
To this end, independent research firm Forrester Wave named Fastly a leader in edge development platforms. Consequently, Fastly's Compute platform received Forrester's highest rating based on 22 criteria.
A lackluster financial performance
Unfortunately, Fastly does not appear to have capitalized on this opportunity as it should.
In 2023, revenue of $506 million rose 17% from year-ago levels. This was well below the predicted growth for the industry. Moreover, its remaining performance obligations (RPO) actually fell 1% versus the previous quarter. Given the fast growth of the industry, it is a negative sign that the company is making progress on what should be a growing backlog.
Worse for Fastly, its peer Cloudflare grew its revenue by 33% over the same period, nearly double the growth rate for Fastly. Such a performance leaves investors questioning whether Fastly has fully capitalized on the AI-driven opportunity in the edge computing industry.
Still, not all of Fastly's financials are negative. Its annual revenue retention rate is above 99%, meaning it holds on to nearly all its customers. Also, net revenue retention was 113%. While that fell slightly from 114% a year ago, it shows that long-term customers continue to spend more on its platform.
Additionally, Fastly arguably has an edge thanks to valuations. Amid its performance, Fastly sells for a price-to-sales (P/S) ratio of less than 4, a low level given its growth potential. In contrast, Cloudflare's sales multiple of 25 may price it for perfection, which could deter investors who might otherwise want to choose Cloudflare over Fastly.
Investing in Fastly stock
At such levels, Fastly is a hold and could arguably be a buy for some investors. Admittedly, investors should probably choose Cloudflare over Fastly if valuations were similar, as Cloudflare seems to have capitalized on the industry's growth more effectively.
However, Fastly's P/S ratio is less than one-sixth that of Cloudflare, giving investors some justification to buy Fastly shares as a speculative investment. Considering that Fastly continues to grow and retain its client base, the rapid growth of the edge computing industry may create a buy case for more risk-tolerant investors.
