Fastly (FSLY +1.85%) is having all sorts of trouble figuring out how to grow within an industry that's booming. The edge computing market is expected to expand by nearly 37% annually through 2030. Beyond content delivery and security, the artificial intelligence boom could turbocharge the industry as customers look to run AI models as close to users as possible.
While there's certainly a viable growth story for Fastly, there's one good reason to run away from the stock.
NASDAQ: FSLY
Key Data Points
Living in the shadow of Cloudflare
The 800-pound gorilla of the edge computing market is Cloudflare (NET +3.66%). As Fastly has struggled to grow, Cloudflare has had little trouble winning new customers.
Fastly's revenue grew by just 15% year over year in the fourth quarter to $138 million. In contrast, Cloudflare grew its fourth-quarter revenue by 32% to $362.5 million. Cloudflare is more than twice as big as Fastly and growing more than twice as rapidly.
The lackluster comparisons don't stop there. Fastly managed a gross margin of just 55% in the fourth quarter, quite low in the world of cloud computing stocks. Cloudflare's gross margin was a much higher 77%.
Neither company is profitable on a GAAP basis, but Cloudflare has reached a point where it's generating positive free cash flow. While Fastly produced a free cash flow loss of about $31.9 million in 2023, Cloudflare reported a free cash flow profit of $119.4 million. This cash flow plus a stronger balance sheet gives Cloudflare far more resources to invest in new products.
Part of Cloudflare's secret sauce is its ability to rapidly innovate and iterate. The company continually adds new products and services, in some cases allowing users free access during beta periods as the bugs are stamped out. Cloudflare's D1 database, a distributed database product that works with the company's other serverless computing products, only began charging for usage this month after a long public beta.
Cloudflare also makes it easy to sign up and try out services, with many offering a generous free tier. While Cloudflare generates the bulk of its revenue from enterprise customers, an army of free and small-time users boosts the company's mindshare and provides opportunities to convert those free users into paying users down the road.
Fastly, on the other hand, is very much a "talk to sales" kind of platform. Although some of Cloudflare's products are reserved for big-spending enterprise customers, the company generally makes it much easier than Fastly to get started.
Sluggish growth ahead
Fastly's guidance for 2024 suggests that the situation won't get any better this year. The company expects revenue to grow by about 15%, a bit below its 17% growth rate in 2023. Meanwhile, Cloudflare's outlook calls for 27% revenue growth in 2024.
Fastly finds itself outclassed by Cloudflare at every turn. While Fastly stock is much less expensive, trading for just over 3 times revenue guidance versus nearly 20 times revenue guidance for Cloudflare, it's cheap for a reason.
With Fastly growing far more slowly than the industry in which it operates, the stock doesn't look like a long-term winner to me.
