With investors flocking to high growth cloud stocks in light of COVID-related expansion, is Fastly the wrong choice for many?
Fastly (NYSE: FSLY) is an American edge-computing specialist company. Despite revenues of $200 million in 2019, and 39% year-on-year growth, the company is still relatively small. Many of the company’s clients, such as Spotify, Slack Technologies, and Ticketmaster, have developed a heavy reliance on its data delivery and edge-computing services. Nonetheless, Fastly’s competitors include Amazon CloudFront, Akamai, and Cloudflare (NYSE: NET), with the latter being the one to watch out for especially.
Cloudflare is also an American-based company specializing in web-infrastructure and security, providing content-delivery-network services, like Fastly, as well as Distributed Denial-Of-Service (DDoS) mitigation and distributed domain-name-server services with $129 million revenue in 2019. Cloudflare benefits from having more diverse revenue streams than Fastly, with a wider customer base. Cloudflare has experienced this higher growth in customer base compared to Fastly, possibly due to its free package and more incremental pricing structure.
Now, the million-dollar question — is Cloudflare a better option than Fastly? In short, not necessarily.
Midway through October, Fastly shares plummeted, dropping the share price by over a third. The company announced that preliminary third-quarter revenue was now expected to be below its previous guidance for the period. Revenue for the period ending September 30 was originally forecasted to be between $73.5 million and $75.5 million, but this was adjusted to be between $70 million and $71 million, causing turmoil among investors. Shares plummeted by almost 30% within a day of the news breaking.
The company’s earnings report on October 28 confirmed this, as well as causing the company’s share price to drop even further. It reported $71 million revenue in Q3, along with a net loss of 4 cents per share. Nonetheless, this $71 million in revenue is still an astonishing 42% year over year increase. This drop in revenues is due to some of Fastly’s customers experiencing less usage than expected, which includes ByteDance, the owner of Tiktok, who alarmingly cited an ‘uncertain geopolitical environment’. Should this weaker than expected revenue for Q3 encourage investors to avoid Fastly and to instead go with the less volatile Cloudflare, or, given the 45% drop in share price since its October 13 high, are we now looking at a great company at a bargain?
Fastly’s fundamentals are still strong, and its CEO Joshua Bixby outlined how the weaker guidance and recent earnings figures reflect the challenges that come with a company operating a usage-based business model. He stated how the fundamentals of the business are still remaining strong along with the demand for the platform, which I strongly agree with. Companies of tomorrow like Slack Technologies, GitHub, and Shopify are all using Fastly. Management and engineers at Fastly have taken a forward-thinking approach to the design of the platform, looking at the technological needs of tomorrow instead of today. They have also committed to making long-lasting customer relationships which will hopefully go in their favor in the coming years. This, with thanks to our society’s ever-growing demand for faster internet, will pay off for Fastly in the mid to long term.
Lessons to Learn?
In my opinion, the drama surrounding Fastly’s Q3 results should come as a great lesson – expect volatility. Most great companies thriving today have experienced hurdles at some point. Docusign Inc fell 16% in 2019 due to weak guidance. Livongo Health saw a drop of 40% in September 2019, a 54% drop from its IPO price. Etsy lost 21% in August 2019 due to weak performance results. Shopify fell 28% due to revenue growth slowing in 2019. These great companies experiencing temporary turmoil should remind us that the key to successful investing is to go long. I believe we will see a similar scenario with Fastly as we did with the likes of Shopify and Livongo Health.
So, Should I Dump Fastly for Cloudflare?
In my opinion – nope. When it comes to Fastly versus Cloudflare, it is safe to say that this will not be a single winner race, and it’s obvious that the cloud services market is not a niche market. The market was valued at $264.80 billion in 2019, with projections to reach $927.51 billion by 2027 – this is a CAGR of 16.4% from 2020 to 2027.
Fastly is a great company, and Cloudflare too, but I don’t see just one company capturing the majority of this market on its own. This is not a case of ‘if one goes up, the other must go down’. Both companies will be able to prosper and thrive in a market of this size, and I am confident they will.