Fastly Inc: Tech Stock Soared 217% Year-to-Date; Will Rally Continue?

A Tech Stock That Delivers Astronomical Returns

To many people, Fastly Inc (NYSE:FSLY) may not be a familiar name. But if you consume digital content, chances are you’ve encountered web sites or apps that use the company’s technology.

Headquartered in San Francisco, Fastly is a cloud computing services provider that helps companies speed up the delivery of digital content to consumers.

Fastly was founded in 2011 and has already established a strong position in its operating market. Its customers include many of the world’s most prominent companies, such as Vimeo LLC, Shopify Inc (NYSE:SHOP), Pinterest Inc (NYSE:PINS), and New York Times Co (NYSE:NYT). (Source: “Investor Presentation August 2020,” Fastly Inc, last accessed November 10, 2020.)

The cloud software company completed its initial public offering (IPO) in May 2019. As the chart below shows, Fastly stock was trading mostly around the $20.00 mark up until the COVID-19 outbreak this year.

And then, all of a sudden, FSLY stock shot through the roof.

Fastly Inc (NYSE:FSLY) Stock Chart

Chart courtesy of StockCharts.com

There was a good reason for the enormous rally in Fastly stock. The COVID-19 pandemic led to lockdowns in many parts of the world.

Moreover, even after the lockdowns got lifted, many people continued to work, learn, and shop from home. And that made digital transformation a necessity for a lot of businesses.

From retail, media, and entertainment companies to financial and educational technology firms, businesses across industries have realized the importance of providing customers with a fast and reliable digital experience. And Fastly’s platform came right to the rescue.

Indeed, the company has an expanding customer base. Fastly had 2,047 total customers in the third quarter of 2020, up from 1,951 in the second quarter. (Source: “Shareholder Letter Q3 2020,” Fastly Inc, October 30, 2020.)

Notably, the number of enterprise customers—defined as customers that spend $100,000 or more in a 12-month period—grew from 304 to 313 in the third quarter of this year.

A growing enterprise customer base is a major growth driver for Fastly. Enterprise revenue now accounts for around 88% of the company’s total revenue.

The business is recurring, too, thanks to the stickiness of Fastly’s “edge cloud platform.” In the third quarter, the company had a net retention rate of 122%.

That rate measures the net change in monthly revenue from existing customers in the last month of the quarter, compared to the last month of the year-ago quarter. Therefore, a net retention rate of more than 100% indicates that existing customers are spending more money at Fastly.

In the fast-changing tech world, a strong retention rate can provide investors with peace of mind.

And as you’d expect from a tech stock that skyrocketed this year, Fastly’s business was booming. In the third quarter of 2020, the company generated $71.0 million of total revenue, representing a 42% increase year-over-year. Adjusted gross margin was 59.8% for the quarter, marking a 370-basis-point expansion from 56.1% in the year-ago period.

At the bottom line, Fastly had an adjusted net loss of $0.04 per share for the quarter. While that means the company is yet to be profitable, the amount was much narrower than the $0.09 adjusted net loss per share incurred in the third quarter of 2019.

Of course, if you’ve been following FSLY stock, you’d know that its shares actually tumbled after the company’s last earnings release. Market participants seemed to be concerned with the guidance, in particular.

Previously, management expected Fastly to generate $290.0 to $300.0 million of total revenue in full-year 2020. In the third-quarter earnings call, they revised the full-year revenue guidance range to $288.2 to $292.2 million.

While the lower guidance was not good news, it should be noted that, in 2019, the company’s total revenue was $200.5 million. So even if Fastly Inc merely reaches the lower end of its revised guidance range, it would be delivering very strong top-line growth.

Analyst Take

At the end of the day, tech stocks are some of the most volatile tickers in the market. And it’s not unusual to see shares of a hot tech company experience some pullback after a strong rally. With a fast-growing business, strong customer retention, and path to profitability, Fastly Inc could be a worthy pick for the long run.