Down Over 30% Since August, Is Recent IPO Fastly a Buy for 2020?

Our demand for data is insatiable. Driven by smartphones and the rise of streaming video, the amount of information being transported via the internet has boomed in recent years, and network hardware giant Cisco still sees traffic growing over 20% annually through 2022.

That made cloud-based edge computing company Fastly (NYSE:FSLY) an intriguing stock when it had its IPO in the spring of 2019…

After surging in its debut and eventually doubling from its IPO price in early fall, shares are down over 35% from their highs in the fourth quarter — putting many post-IPO investors in the red. It will most definitely be a bumpy ride, but now looks like a good time to pick up a few shares with a new year upon us.

What happened in year one

First off, as Fastly disclosed in its prospectus ahead of its public debut, edge computing and CDNs (content delivery networks) are a crowded space. All of the data moving around the world can’t be handled by any one player, and Fastly is an upstart going against well-established legacy CDNs like Akamai and other aspiring disruptors like Cloudflare, not to mention the biggest cloud computing providers like AmazonMicrosoft, and Alphabet investing in their own edge computing platforms.

Nevertheless, the market is massive and still growing by mammoth numbers — especially CDNs, which Cisco says will carry 72% of all global web traffic by 2022 compared with just 56% in 2017. Plus, with mobile-based traffic growing twice as fast as the average and an increasingly diverse set of devices making requests — from smartphones to smart watches, laptops to smart sensors — that gives Fastly plenty of room to scoop up some market share. Its non-centralized delivery network at the “edge,” which the company defines as the moment data leaves a company’s control and moves to a user’s device or network, is also well-suited to today’s needs. Spending on cloud-based “edge” computing is expected to pick up some serious steam in the next few years, garnering tens of billions of dollars spent every year in short order.

And scoop up market share it has. In addition to picking up new customers (total customer count was 274 in the third quarter of 2019 compared with 213 a year ago), Fastly’s net dollar-based expansion rate was 135% in the third quarter, implying existing users of its platform spent an average of 35% more than in the same period in 2018. Here’s what that equated to in the way of business results.

Metric Q3 2019 Q3 2018 Change
Revenue $49.8 million $36.8 million 35.3%
Gross profit margin 55.2% 54.6% 0.6 pp
Operating expenses $40.3 million $27.8 million 45.0%
Adjusted net profit (loss) ($8.3 million) ($7.1 million) N/A

PP = PERCENTAGE POINT. DATA SOURCE: FASTLY.

The only downside is that revenue growth does appear to be slowing, even though Fastly is still so small. The 35% revenue growth rate in its third quarter compares to 40% in the first quarter. That could account for some of the stock’s recent tumble, as does the lockup period on insider shareholder ownership that expired in November. Net losses do keep adding up as well, though Fastly did have $54.7 million in cash on the books at the end of the last quarter…

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