FSLY - Fastly: Resurging As A Promising Investment Opportunity

2023-05-31 14:30:44 ET

Summary

• Fastly, Inc.'s customer base continues to expand, with Google being one of its recent strategic customers.
• While Fastly's revenue growth rates have stabilized at mid-teen levels, its profitability profile and free cash flow are struggling to gain traction, posing challenges to investor confidence.
• All that being said, I make the argument that investors that wanted to sell out of Fastly would have already done so. Meaning, that there's apparently an absence of Fastly sellers.

Investment Thesis

Fastly, Inc. ( FSLY ) offers investors a very mixed set of prospects. On the one hand, its profitability profile leaves a lot to be desired. On the other hand, Fastly's customer base continues to expand. Case in point, Fastly recently won Alphabet Inc. ( GOOGL , GOOG ) aka Google as a strategic customer.

Presently, the stock is still down from its highs and very much out of favor with investors.

I continue to believe that Fastly has the makings of a good contrarian bet .

Why Fastly? Why Now?

Fastly is a content delivery network (''CDN'') that provides services to deliver content quickly over the Internet. Fastly's cloud allows businesses to cache content closer to end-users, thereby reducing the time it takes for content to travel over the internet.

The idea is that websites with massive amounts of traffic, such as media companies or e-commerce platforms, can use Fastly for fast and reliable content delivery.

The business has been perceived as having lost its ways, given that the share price is down more than 80% from its highs. However, consider the following table:

What you see above, is that Fastly's customer count continues to increase. As of Q1 2023 , the total customer count was up more than 4% y/y.

Yes, these aren't the revenue growth rates that are congruent with a fast-growing business, but at the same time, I don't believe that anyone looking at Fastly today is expecting much from Fastly either.

Meanwhile, Fastly's net retention rates remained higher than 100% in the current period. The negative point is that in the same period a year ago, Fastly's net retention rates were 114%, therefore the current net retention rate of 105% isn't quite as compelling.

Next, we'll turn to discuss Fastly's financials .

Revenue Growth Rates Stabilize

Fastly's revenue growth rates have matured. The business is now on a path toward mid-teen revenue growth rates. Naturally, given the current challenging macro environment, investors would like to see Fastly's growth rates relying less on pricing increases and more on its growth from a broad customer adoption.

On the other hand, Fastly has recently won over Google as a strategic customer. Google chose Fastly's Oblivious HTTP relay as part of their privacy sandbox initiative called FLEDGE. Fastly's solution aims to enhance online privacy for Chrome users.

That being said, we'll next turn our focus to the one area that Fastly needs to meaningfully improve.

Profitability Profile Failing to Gain Traction

As you can see above, Fastly's free cash flow profile isn't gaining traction on the back of operating leverage from more revenues this year compared with the prior year. In actuality, Fastly's reported free cash flow is essentially equal in both quarterly periods.

And that is far from a bullish setup. The time when investors were praising companies for aggressively investing in growth has now come and gone.

One position consideration about Fastly's financial position is that its balance sheet is slowly improving. A few weeks ago, Fastly took the opportunity to repurchase, at a discount, close to $200 million worth of convertible notes.

On the other hand, this still leaves Fastly with a net debt position of very approximately $50 million. Accordingly, Fastly's balance sheet is improving , but it needs to demonstrate more meaningful improvements soon if Fastly is to regain investors' confidence that Fastly is ''investment worthy.'.

The Bottom Line

On the back of AI Fastly's content delivery network seeing increased demand, meanwhile, its stock is no longer expensively valued.

As you can see above, the multiple to sales that investors have been willing to pay for Fastly, Inc. has remained stable throughout 2022. This means that investors have reached a point of total apathy. Hence, investors that wanted to exit their Fastly, Inc. holdings have already done so. After all, for nearly two years, this stock has already been under tremendous selling pressure already.

The investors that are still holding onto Fastly, Inc. stock apparently will not sell at any price. And if you haven't got any more sellers left in a stock, that means that anyone looking at the stock will likely be a net buyer.

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