Fastly Earnings: Cost Controls Make Significant Progress While Growth Stays High

Fastly FSLY continues to make fantastic progress on its margins after costs seemingly spiraled out of control last year. The firm’s second-quarter sales and operating loss both came in well ahead of previous guidance, leading the firm to raise its full-year outlook. The firm also generated positive free cash flow for the first time since the middle of 2020, when the pandemic was supercharging Fastly’s business. These types of results are already embedded in our forecast, and we are maintaining our $20 fair value estimate. We now think the stock is only mildly undervalued, as Fastly remains a Very High Uncertainty stock in our view.

Sales growth accelerated to 20% year over year, including a trailing 12-month net retention rate of 116% (same customer sales, including customer churn). Higher spending by Fastly’s biggest customers was the main driver, with the firm saying it saw strong cross-selling and upselling. We think this trend can continue, as we expect customers to continue taking advantage of Fastly’s expanded security offerings, and we think Fastly is one of the best-positioned firms to meet growing edge computing needs.

Fastly’s GAAP gross margin exceeded 52%, up from below 45% in the year-ago period. Spending last year to get ahead of future capacity needs has dropped, and the firm has found success with other cost-cutting initiatives. As a result, the firm’s net operating loss of $7.8 million was less than half the low end of guidance, and, like free cash flow, adjusted EBITDA was positive for the first time in three years. While we’ve expected cost improvements, this quarter had some one-time and timing benefits, so we don’t believe these levels are indicative of a new normal. We don’t expect durable adjusted EBITDA until 2024, or free cash to stay consistently positive until 2025.