Fastly: Looking Ahead To 2022
Summary
-Fastly's shareholders have had a tough 2021. But here's what investors should think about in the year ahead.
-Fastly's path to profits is still a long time off.
-At 13x next year's revenues, this stock is now fairly priced.
Investment Thesis
Fastly (FSLY) is a content delivery network ("CDN") and distributed denial-of-service (DDoS) mitigation platform. Fastly delivers fast, secure, and scalable digital experiences.
Note that this stock has been anything but an easy stock to hold for shareholders. The main issue it is facing is that the business has usage-based revenue that spiked during COVID and is now facing tough comparisons with last year.
Even though the stock is a lot cheaper right now than it was earlier in the year, it's still difficult to get positively attracted towards this name.
Fastly Moving Up and Down
Investors considering Fastly today are not the same shareholder base that was considering this stock back in 2020. Everyone who is thinking about Fastly today is thinking about a stock that is down approximately 50% in 2021. That investor is a bargain hunter, they are not a growth investor with a growth mentality and a growth-like expectation.
The shareholder involved with Fastly now at this stage is much more patient, recognizing that all the air has been taken out of the stock. This is a good framework for us to think about when discussing the opportunity ahead.
Fastly Revenue Growth Rates
As you know, on Wednesday, November 3, Fastly will report its highly anticipated Q3 2021 results. Investors will be incredibly eager to ascertain whether or not Fastly has what it takes to reignite its growth rates back to 20% to 25% CAGR in 2022.
Presently, investors are expecting Fastly's exit out of Q4 2021 to be just under 20%. But given that expectations are so low right now, if Fastly is able to upwards revise its Q4 2021 guidance to higher than 18% than it is currently guiding to, investors would rapidly turn around and re-rate this stock higher.
Right now, the biggest insight investors crave is visibility into 2022. Can Fastly return to growing at higher than 20% CAGR? Because if Fastly can give investors the confidence that it's back on the growth path, this stock would meaningfully re-rate higher.
Fastly's Path to Profitability
For Q2 2021, Fastly's non-GAAP operating margins stood at negative 21%. Then, for Q3 2021, Fastly's non-GAAP operating margins are expected to arrive at a negative 22% to 23%.
Even if its full-year guidance implies that Q4 2021 should improve its profitability and come in around negative 15% of non-GAAP operating margins, all together investors are left searching for exactly when Fastly's growth story starts translating into sustainable profits.
On a positive note, Fastly's acquisition of Signal Sciences has landed it in Gartner's Challenger square for the first time.
If you consider where the current crowd favorite, Cloudflare (NET), is on this graphic, and how high investors' expectations are for that stock relative to where investors' expectations are for Fastly, this certainly adds some nuance to Fastly's valuation.
Valuation - FSLY Stock Fairly Priced Already
Fastly is priced at 13x next year's sales. This is far from a bargain-basement valuation, particularly once we acknowledge that Fastly's revenue growth rates are so volatile that it's difficult for investors to meaningfully consider this investment.
Furthermore, as already discussed, Fastly is still a long way away from turning its topline growth into an attractive profit.
On the other side of the equation, investors will be quick to remark that Cloudflare is priced at 62x forward sales. In that light, Fastly is really quite cheap.
From that point of view, I would remark that Cloudflare's pace of innovation is very high, that Fastly is not in the same league. Also, Cloudflare is already incredibly close to breakeven on a non-GAAP operating margin, while Fastly is a long way away. Not to mention that Cloudflare's growth profile remains impressive at more than 50% y/y growth, even now, as it climbs close to $700 million in revenue run rate.
For Fastly to be an attractive investment, shareholders will need to see its growth rates sustainably return to closer to mid-25% CAGR. And to have confidence that the outages it had in the summer, aren't going to return any time soon.
The Bottom Line
As it stands right now, investors considering this name are looking at a highly commoditized CDN platform with high-teen revenue growth, and that's a really tough buy for investors.
That's why, despite Fastly falling from grace, this value investor is giving this stock a pass, and deploying my capital into other stocks right now, with more compelling upside potential.
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