Fastly Beats Expectations in Q4

Fastly FSLY reported a very good fourth quarter, with nearly all key sales metrics accelerating and both revenue and the operating loss beating management’s guidance. While the continued sales momentum was a positive, cost control was the biggest question weighing on the stock in 2022, and Fastly now seems to be on the right track. Margins in the fourth quarter improved significantly from earlier in the year, and management’s 2023 guidance implies the firm will be moving quickly toward profitability. With fast revenue growth and significant cost improvement already built into our forecast, we are maintaining our $20 fair value estimate.

Excluding a nonrecurring payment, revenue grew 20% year over year in the fourth quarter. The trailing 12-month revenue net retention rate, which represents same customer sales and includes the impact of churn, was 119% and accelerated in each quarter of 2022. We believe a similar level of sales momentum is maintainable, as Fastly can not only take share in the content delivery market but should have incremental opportunities in providing edge computing, which we expect to become a much bigger market than it currently is, and tacking security solutions onto its sales. Fastly’s average enterprise customer, which essentially includes customers that spend over $100,000 per year, spent nearly $800,000 with Fastly in 2022, up 11% from the year prior. The firm is also significantly growing its enterprise customer base. It now has nearly 500 enterprise customers, up from fewer than 300 at the end of 2019.

Seemingly out-of-control costs, rather than sales weakness, have been Fastly’s biggest downfall, but there are signs that costs are getting under control and that operating leverage can take hold. We think the firm can reach adjusted EBITDA profitability in 2024. Adjusted EBITDA was nearly breakeven in the fourth quarter, which is seasonally the strongest, but we think it foreshadows the type of leverage this business can get as it ramps sales.