Fastly: Emerging Opportunities and Pathway to Profitability Highlight Investor Day Enthusiasm

Fastly’s FSLY investor day on June 22 focused on its platform capabilities and the opportunity in front of it, as needs at a network’s edge become more critical. Perhaps most encouraging to investors, Fastly laid out a financial model that demonstrates its operating leverage and therefore profits and cash flow it projects based on its current revenue drivers—delivery and security. Management hinted that there could be upside to its targets if material contributions arise from areas like edge computing. Given the optimism already embedded in our projections, we are not changing our $20 fair value estimate, leaving the stock only modestly undervalued, in our view.

Fastly confirmed that the content delivery business and security currently make up nearly all of its revenue, with security as the big growth driver. The Signal Sciences acquisition in 2020 bolstered the firm’s security offerings, and Fastly has been unifying its platform, which leads to better penetration for both security and delivery and should help with its nascent offerings. Edge computing and observability (to give customers insight into their networks) currently make up an immaterial portion of revenue but figure prominently in management’s vision.

Fastly is targeting a high-teens annual sales growth rate through 2026, based on current trends in its delivery and security businesses. At this trajectory, management anticipates being adjusted EBITDA breakeven in 2023 and free cash flow breakeven in 2024, with both ramping from there. Success with edge computing and observability would provide further upside, and we are especially optimistic about the need for edge computing. In our view, the low latency required for many of the artificial intelligence and Internet of Things functions that are becoming more prominent will require edge computing, and we think Fastly is well positioned to take its share, given the latency capabilities its network can provide relative to potential competitors.