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Fastly Inc.
FSLY-N
HOLD
Feb 20, 2023
$15.900
Stock price when the opinion was issued
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COMMENT
Forget "risk-off" trading. Rather, IPOs of 2020 came in way too hot and got burned; Covid stocks like Docusign are hammered; Chinese stocks are a train wreck; cryptos hit; specific retailers hit by supply shortages; and then there are cloud-based stocks trading at sky-high price-to-sale multiples. He's a fan of this group, but at ridiculous valuations. The cloud isn't dead, though. Inflation erodes the future value of these stocks. Also, these stocks are speculative, which tend to trade as a group; investors sell first and ask questions later. A few bad earnings can crush the entire group, like Twilio and Docusign. Salesforce actually reported strong results though a weak forecast. As a group, the cloud stock were down 33% on average, in a bear market. WIX and Fastly down the most, but are both good companies offering fine services. The cloud stocks peaked a long time ago, like Jan-Feb, like Zoom. Only 13 out of 50 of these stocks trade at less than 100x earnings! Ones with a lower valuation have done better than the higher ones during this rout. Even now, there's still expensive on a valuation basis.
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RISKY
Trevor Rose’s Insights - Trevor’s most-liked answers from 5i Research
Momentum is strong, cash burn is slowing down, profitability HAS improved, and revenue growth remains resilient. In 2024-Q3, net retention rate went down to 114% compared to 116% in the 2024-Q2, but overall above 100% is still considered very solid. FSLY is expected to continue growing its topline around 15% over the next few years, and achive EBIT positive in FY2025. We think FSLY is the type of name that would perform well in this market environment. We would be conscious of position size and would consider it risky, but it may still have room to move higher. The balance sheet has improved and is now in good shape also.
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FSLY is up 96% YTD, and down 16% for 52-weeks.
Its losses, negative cash flow and loss of market share were concerns in the past 18 months.
It has about $150M net debt, sales of $500M expected this year and negative cash flow of $70M last year.
Sales are still growing, but at a slower pace.
The fundamentals are still not that great. But the last quarter was better than expected. 4Q sales and gross margins beat estimates as it continues to do a good job of expanding business within existing accounts, reflected in a 4Q dollar-based net retention rate of 123% vs. 122% in 3Q.
Guidance for 2023 revenue growth is 15.6% at the midpoint, mostly through selling more into existing accounts and to a lesser degree from share gains.
Security is the main growth engine, with Fastly looking to expand in this market by building on web-protection technology acquired through the Signal Sciences deal.
The company also has ambitious plans to expand its margins, with a goal to approach a 60% adjusted gross margin by year-end. It will do this largely through more efficient use of bandwidth, which represents one-third of its costs.
It is a very high beta name, and will need a strong tech market to continue to perform well.
Based on recent momentum we would be OK holding it for three to six months, in anticipation of peak US interest rates and a general market recovery.
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