Company Reports

Fastly's second-quarter results fell neatly into the guidance it had given, but management materially reduced its full-year guidance for the second straight quarter, and it is continuing to see demand problems from its biggest customers. Management's concern about the revenue trend led it to implement a restructuring to take costs out of its business. It feels like the company is in crisis, and we question whether it can make these moves to preserve near-term results without dampening the long-term growth outlook that was imperative to justify the firm's valuation. We're not implying these are the wrong moves; we suspect they're absolutely necessary. However, we think Fastly will have difficulty returning to the high teens growth trajectory it had been on. We're reducing our fair value estimate to $5 from $10, and we see Very High uncertainty in this stock.

Fastly has a new take on the now relatively antiquated model for running content delivery networks, or CDNs. We believe the more modern approach gives Fastly an opportunity to take share from legacy CDN providers with a lower-cost model, but it has recently struggled to execute on this vision.

Fastly has a new take on the now relatively antiquated model for running content delivery networks, or CDNs. We believe the more modern approach gives Fastly an opportunity to take share from legacy CDN providers with a lower-cost model, by way of a smaller geographic footprint.

Fastly’s first quarter was fine, but its bleak second-quarter outlook, big cut to full-year guidance, and the reasoning behind the weakness creates concern that Fastly is at a competitive disadvantage that will seriously weigh on performance. At the very least, we expect the firm’s long-term growth rate to come down materially. We are cutting our fair value estimate to $10 from $20 because of a three-point percentage cut to our average annual sales growth projections over the next 10 years and a slower ramp to profitability to reflect less projected operating leverage. Our Very High Uncertainty and no-moat ratings are unchanged, so we don’t see the stock as particularly attractive despite a 30% decline in after-hours trading.

No-moat Fastly reported fourth-quarter earnings on Feb. 14 that sent its stock down more than 20% in after-hours trading, but results were not too bad, and 2024 guidance puts the company on the improving trajectory that we’ve expected. While we think the market is overreacting to a slightly soft fourth quarter and first-quarter outlook, the stock had gotten ahead of itself, in our view. We’re maintaining our $20 fair value estimate, which leaves the stock only fairly valued after the selloff.

Fastly has a new take on the now relatively antiquated model for running content delivery networks, or CDNs. We believe the more modern approach can allow Fastly to continue taking share from legacy CDN providers with a lower-cost model, by way of a smaller geographic footprint.

No-moat Fastly continued to see momentum in its business in the third quarter, with the solid execution extending this year’s trend. Margins have improved dramatically but backtracked a bit this quarter. Usage costs that caused the hiccup should prove temporary, and we expect margin expansion to be back on track by 2024. The after-hours pop in the stock seems excessive, as results were at the top end of guidance and management essentially maintained full-year guidance while raising the midpoints. Nonetheless, the move does bring Fastly closer to where we believe it’s fairly valued after the recent selloff. We’re maintaining our $20 fair value estimate, as nothing in the quarter changes our outlook.

Fastly has a new take on the now relatively antiquated model for running content delivery networks, or CDNs. We believe the more modern approach can allow Fastly to continue taking share from legacy CDN providers with a lower-cost model, by way of a smaller geographic footprint.

Fastly continues to make fantastic progress on its margins after costs seemingly spiraled out of control last year. The firm’s second-quarter sales and operating loss both came in well ahead of previous guidance, leading the firm to raise its full-year outlook. The firm also generated positive free cash flow for the first time since the middle of 2020, when the pandemic was supercharging Fastly’s business. These types of results are already embedded in our forecast, and we are maintaining our $20 fair value estimate. We now think the stock is only mildly undervalued, as Fastly remains a Very High Uncertainty stock in our view.

Fastly has a new take on the now relatively antiquated model for running content delivery networks, or CDNs. We believe the more modern approach can allow Fastly to continue taking share from legacy CDN providers with a lower-cost model, by way of a smaller geographic footprint.

Fastly's investor day on June 22 focused on its platform capabilities and the opportunity in front of it, as needs at a network’s edge become more critical. Perhaps most encouraging to investors, Fastly laid out a financial model that demonstrates its operating leverage and therefore profits and cash flow it projects based on its current revenue drivers—delivery and security. Management hinted that there could be upside to its targets if material contributions arise from areas like edge computing. Given the optimism already embedded in our projections, we are not changing our $20 fair value estimate, leaving the stock only modestly undervalued, in our view.

Fastly reported a good first quarter that contained no big surprises but showed the company continuing to better control its costs. The ability to improve margins without sacrificing revenue growth is crucial for Fastly as it works to achieve profitability, and we have growing confidence that the firm is on track. With no change to the company’s full-year outlook after a first quarter that very slightly exceeded guidance, we are making very few adjustments to our model and are maintaining our $20 fair value estimate.

Fastly reported a very good fourth quarter, with nearly all key sales metrics accelerating and both revenue and the operating loss beating management’s guidance. While the continued sales momentum was a positive, cost control was the biggest question weighing on the stock in 2022, and Fastly now seems to be on the right track. Margins in the fourth quarter improved significantly from earlier in the year, and management’s 2023 guidance implies the firm will be moving quickly toward profitability. With fast revenue growth and significant cost improvement already built into our forecast, we are maintaining our $20 fair value estimate.

Fastly has a new take on the now relatively antiquated model for running content delivery networks, or CDNs. We believe the more modern approach can allow Fastly to continue taking share from legacy CDN providers with a lower-cost model, by way of a smaller geographic footprint.

Generally, we haven’t been disappointed with the sales growth Fastly has produced over the past year, but the firm seemed to be running its business very inefficiently, and margins were awful. Third-quarter sales came in much higher than we expected and marked the firm’s best result this year relative to the guidance it provides. But more significantly, margins finally turned up in a big way after crashing so far in 2022. In addition, we thought new CEO Todd Nightingale—in his first earnings call since joining the company—said all the right things to give investors confidence that Fastly will get on the right track. Although Fastly’s stock, which was once built on hype, has crashed in the last year and a half along with its cash-burning brethren, we believe the company has a path to long-term success. We rate the stock as having Very High uncertainty but see it as materially undervalued relative to our unchanged $20 fair value estimate.

Fastly has a new take on the now relatively antiquated model for running content delivery networks, or CDNs. We believe the more modern approach can allow Fastly to continue taking share from legacy CDN providers with a lower-cost model, by way of a smaller geographic footprint.

Fastly reported excellent sales growth in the second quarter, exceeding the high end of its guidance, and raised its full-year sales guidance by $10 million, to a range of $405 million-$415 million. However, margins continued to deteriorate, with the second-quarter gross margin nearly 15 percentage points below the highs hit in 2020. Fastly is now guiding to a non-GAAP operating loss as high as $78 million in 2022, up from a $60 million-$70 million loss previously. While the second-quarter operating loss was ugly, we think the stock selloff in the wake of the earnings release will prove to be unwarranted. The weakness is consistent with the first-half cost pressure the firm telegraphed—albeit to a greater degree—and we expect margins to improve significantly in the second half. Still, we’re reducing our fair value estimate to $20 per share from $25 to reflect the longer path toward profitability that we now project.

Fastly has a new take on the now relatively antiquated model for running content delivery networks, or CDNs. We believe the more modern approach can allow Fastly to continue taking share from legacy CDN providers with a lower-cost model, by way of a smaller geographic footprint.

Fastly and Megaport each reported mildly disappointing calendar first-quarter results, but our long-term views of them have not changed. Both were significantly overvalued relative to our fair value estimates at their stock price peaks, but we now think sentiment has swung much too far in the opposite direction. Although both no-moat, positive trend firms have a very high degree of uncertainty and a way to go until they generate profits, we believe they have durable businesses that will play an important role in a world that increasingly relies on data traffic. While they may have benefited from a pandemic environment that kept people home and streaming content, the need for data usage and connectivity is not a fleeting phenomenon. While we don’t expect either to return to their exorbitant sales growth rates of 2-3 years ago (despite acceleration in recent quarters), we believe the firms will still benefit from steady expansion of the markets they serve.

After a couple of disappointing quarters in a row, Fastly’s first-quarter sales exceeded our expectations as revenue growth accelerated. More impressive was the modest increase in full-year top-line guidance, one day after competitor Akamai slashed its full-year sales guidance. Margins remain weak, and we think the firm has its work cut out to reach profitability. We believe a focus on execution as the company matures is the reasoning behind the CEO transition Fastly announced, but the company has just embarked on its search. CEO Joshua Bixby will remain in the role until a successor is found. We are maintaining our $25 fair value estimate and believe the stock is undervalued even if it doesn’t reach its medium- to long-term revenue and margin targets, but there remains significant execution risk.