Should Fastly Stock Be Part of Your Portfolio In 2021?
May 28 2021 - 6:34AM
Finscreener.org
One of the best investments you can make is to hold quality
growth stocks over the long term. Companies that are part of a
rapidly expanding addressable market and are poised to gain
traction among their customer base generally derive outsized gains
and beat broader market returns.
Here, we take a look at one such growth stock Fastly Inc (NYSE:
FSLY)
to see if it should be part of your portfolio in 2021 and
beyond.
An overview of Fastly
Fastly operates an edge cloud platform that processes, serves,
and secures enterprise applications in the U.S. and other
international markets. The edge cloud is a vertical of IaaS
(Infrastructure-as-a-service) that allows developers to build and
secure digital experiences. It offers a programmable platform
designed for web and application delivery.
Fastly also provides edge security solutions including DDoS
protection, transport layer security, compliance services, and edge
web application firewall. It serves customers a range of verticals
including digital publishing, media, and entertainment, online
retail, technology, fintech, and travel.
Fastly went public in mid-2019 and has since doubled in market
value. However, despite its stellar performance FSLY stock is down
62.5% from its record high, making it a solid contrarian bet.
Recent Q1 results
In the first quarter of 2021, Fastly reported revenue of $85
million which is an increase of 35% year over year. Its adjusted
net loss widened to $14 million or $0.12 per share compared to the
prior-year loss of $6 million. While Fastly’s revenue was in line
with consensus estimates, analysts expected the firm to post a loss
of $0.11 per share in Q1.
Fastly raised its full-year guidance for 2021 and expects sales
between $380 million and $390 million which suggests revenue growth
of over 33% year over year at the midpoint. However, Fastly
forecast Q2 sales between $84 million and $87 million in Q2 which
was lower than average Wall Street estimates.
FSLY explained it typically signs customers in the first two
quarters who then ramp up on the company’s platform in the second
half of the year. Historically, its usage expansion has been slower
in Q2 as people generally spend time outside and not on
devices.
If you exclude Signal Sciences, Fastly ended the March quarter
with 2,207 customers, up from 2,084 customers at the end of 2020.
Its enterprise customers also increased to 336, up from 324 in this
period.
During the
earnings call, Fastly’s CEO confirmed, “We saw several
customers wins across hi-tech, e-commerce, digital publishing,
financial services, cryptocurrency, and healthcare, including human
security, a leading bot mitigation provider relied on by many of
the InternetU+02019s largest advertising platforms or enterprises,
a leading provider of multi-layered network switches and
software-defined networking solutions and a leading automotive
insurance SaaS provider, among others.”
In addition to an increase in customer demand, FSLY also
executed its land-and-expand strategy among existing customers. So,
its average enterprise customer spending rose to $800,000 in Q1, up
from $782,000 indicating a strong dollar-based net retention rate
of 139%.
What next for FSLY stock?
Fastly is optimistic its edge cloud platform can seamlessly
combine delivery, edge computing, and security providing the
company with a “tremendous market opportunity”.
The company is valued at a market cap of $5.6 billion and Wall
Street expects Fastly to increase sales by 31.8% to $383.33 million
and by 27% to $486.5 million in 2022. Despite this growth in
top-line Fastly’s loss is expected to expand from $0.18 per share
last year to $0.43 per share in 2021. It means analysts expect the
company to post a loss of $45.6 million in 2021 which is 11.8% of
sales. In 2020, total loss accounted for just 6.6% of total
sales.
FSLY stock is trading at a forward price to sales multiple of
14.6x which is steep for a company that is still posting an
adjusted loss. However, analysts expect the stock to touch $57.33
in the next 12-months which is 20% above its current trading
price.
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