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Fastly share price: how high can it go?

Fastly has become the latest stay-at-home stock to grab investor’s attention. We explain what you need to know about the stock and consider where shares could go next.

Chart Source: Bloomberg

Fastly shares continue to climb to new highs

Fastly is the latest stock to grab attention from investors who are looking for stocks that can not only survive amid the coronavirus pandemic but thrive.

Fastly shares have broken through the $75 mark to reach new all-time highs after rallying more than 500% since the wider stock market hit their lows in March. The fast growing but loss-making business is now worth $7.8 billion, having listed in May 2019 at $16 a share and with a valuation of just $1.45 billion.

What is Fastly?

Fastly was founded in San Francisco, US, in 2011. The company provides software and services that help bring online content to users at faster speeds using an emerging technology known as edge computing, or the edge cloud.

It already has a slew of big name clients including the likes of Twitter and Spotify, and is live in 26 countries. The fact the existing major cloud computing providers – including Amazon, Microsoft and Alphabet – are already ‘partners’ has underpinned confidence in its service.

The edge cloud is a new model being applied in the world of cloud computing. Traditionally, services are provided from large central servers and data centres by a small group of providers. The edge cloud, on the other hand, uses the smart devices connected to provide the processing power needed to provide digital content.

Ultimately, this allows for services to become faster, which is increasingly important as new technologies like 5G emerge and the world continues to adopt intelligent devices. Fastly states that ‘75% of data will be created and processed at the network edge by 2022’.

Importantly, Fastly’s products are programmable, meaning developers can build their own applications and usages. The company believes ‘75% of applications will be built, not bought’, so giving flexibility and empowering developers is key rather than developing apps on behalf of others.

Why is the Fastly share price rising?

There are several reasons why investors are being drawn to Fastly. First and foremost is the coronavirus, which has driven demand for stocks that perform well whilst lockdown measures are in place and people have to stay at home. The second is its strong top-line growth and the third is its improving prospects.

Resilient during coronavirus

The coronavirus pandemic is accelerating the digital transformation of many businesses. Companies are being forced to move online and engage with their customers digitally and Fastly is positioning itself as the perfect partner to get it done.

It has also placed pressure on existing tech businesses to ensure their services are secure and can handle the uptick in audience numbers, such as streaming sites, social media platforms and news services.

‘Suffice it to say, the internet and our business are thriving, in part due to our ability to serve as a trustworthy partner for innovative enterprises around the globe,’ Fastly said in May.

‘We are beginning to witness a digital transformation acceleration across various industries due to secular trends and impacts from events such as Covid-19. Our superior, modern cloud platform plays an even more important role than before as companies look to transform their business models for growth and viability,’ it added.

Fastly, which itself had a ‘seamless transition’ to working from home due to its existing flexible work policy, says its operations have not been affected so far and that its confident it can handle any dramatic shifts in usage and capacity when lockdown measures are eased and travel resumes. Its system is designed to handle spikes in demand and has so far coped well during the pandemic.

Strong top-line growth

Like many smaller tech start-ups, Fastly is growing fast but still incurring losses. This means the investment case comes down to its growth and its long-term prospects. Fastly booked $63 million worth of revenue in the first quarter of 2020, making it a relatively small player in its industry.

However, quarterly revenue grew 38% from the previous year, and it showed it is not only getting existing customers to embrace its services more but that it is continuing to win new clients. The number of ‘enterprise customers’ – defined as those that spend over $100,000 with the company – has steadily grown over the years and now stands at 297, up from 288 at the start of the year.

These clients account for 87% of Fastly’s overall revenue, so it has proven it can get companies to continue to increase spending on its services after they have been introduced to them. At the same time, it is still securing new clients that it hopes will also go on to eventually become enterprise customers, with 1837 clients on its books at the end of March, up from 1743 at the start of the year.

Improving prospects

The coronavirus pandemic has meant the vast majority of businesses feel uncomfortable providing any financial guidance or predictions as to what to expect, but Fastly freely admits it stands to benefit. So much so that it raised its annual guidance for 2020 last month.

‘Despite the current global economic uncertainty, we remain confident in the demand for our mission-critical services and the continued growth of our business in 2020 and the years to come. As such, we have raised guidance for 2020 and expect to make further progress on our path to profitability,’ said Fastly.

Annual revenue this year is now expected to be between $280 million to $290 million, against its previous target range of $255 million to $265 million. That compares to the $200.5 million delivered in 2019, which means Fastly is targeting growth of between 39.7% to 44.6% - implying it will accelerate further this year.

It will still be in the red, but it’s forecasting much narrower losses than before. Its operating loss will now be just $10 million to $20 million rather than $33 million to $43 million, and its generally accepted accounting principles (GAAP) net loss per share will be between $0.08 to $0.15 compared to its initial target of $0.32 to $0.43.

It also revealed on 17 June that it its network had reached 100 terabits per second (tbps) of connected edge capacity, up from 88 tbps at the end of March. This will mean it can provide ‘faster growth, scale, and enhanced safety’ to its clients, and that it has a network capable of handling more than 800 billion requests per day.

It also said it had acquired a ‘talented team and intellectual property’ from a virtual network emulation platform named Tesuto, described as ‘a vital step forward to continuously improve our network’s reliability and capacity.’

Can Fastly keep growing and when will it be profitable?

Fastly is a small player in a large market. The company believes it is chasing a market worth over $35 billion and it has plenty of room to grow. Growth will be the top concern of investors for the foreseeable future and it will have to convince them that it can deliver long-term value rather than short-term hype.

However, Fastly is already trying to escape the red and following a ‘disciplined path to profitability’. Its net loss in the first quarter (Q1) was $12 million, wider than the $10 million posted the year before. However, the fact losses this year will be about a third of what was originally expected suggests it is much closer to achieving that goal than it was at the start of the year.

Fastly ended March with $187 million in cash and that should be enough to see it through the crisis considering its operations burn through about $7 million of cash each quarter, while free cash outflow is around $19 million. Capital expenditure is tied to income and currently equal to about 13% to 14% of revenue, but Fastly expects this to drop down to 10% over the long term. This should help control any concerns about overspending.

Where next for Fastly shares?

Fastly’s growth and improving prospects is what has driven the company’s valuation, but the surge will mean it could be a volatile stock over the coming months. At $7.8 billion, the valuation is almost half of that of competitor Akamai, which has been involved in edge computing for years. Fastly describes Akamai as a ‘legacy’ provider, which is business lingo for old, but the company generates significantly more revenue and, more importantly, is already profitable.

However, Akamai’s is growing at a much slower rate with revenue up just 8% in the Q1, which may justify Fastly’s view of the company. On the other hand, another rival Limelight Networks is yet to breach the $1 billion valuation despite the fact its performance is giving Fastly a run for its money. Limelight generated a similar amount of revenue in the first quarter and that was up 32%, but unlike Fastly, it is already cashflow positive.

How to trade Fastly shares

With IG, you can trade on the best trading platform and back whether you think shares will rise or fall in value. Go long (buy) if you think they will increase in value, or go short (sell) if you think they will decrease in value.

To take a position, follow these simple steps:

  1. Create an IG trading account or log in to your existing account
  2. Type ‘Fastly’ or the name of the stock you want in the search bar and select it
  3. Choose your position size
  4. Click on ‘buy’ or ‘sell’ in the deal ticket
  5. Confirm the trade

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