Fastly - investment in the whole of the internet

Secular trend

One of the big secular trends I like to follow is the move to the cloud. Every single year more and more people, countries gain access to the internet and world wide demand for digital content is on the rise.

There has been an exponential increase in the amount of data on the cloud and this has meant that the load on the cloud has increased substantially to create a new problem called latency. One can think of latency as the time lag between the user request for something and the receipt of that requested thing. For e.g we all internet users expect websites to load faster, download /stream movies quicker and instantly from the cloud. What was once referred to as the ‘cloud’ is not referred as the central cloud - it is this shift from the ‘central cloud’ to ease the latency issue towards the ‘edge cloud’ which is the theme we are interested in for the future.

‘Edge cloud’ is a cloud computing platform that operates as close as possible to user i.e on the edge of the network to help companies reduce latency and exceed their customer expectations!

Think about self-driving cars and 5G, this trend is only going to get bigger and bigger in the coming years.

What does Fastly do and why is it a good investment

Fastly is an edge cloud provider that has demonstrated far better technology than any other company in this area - For proof, just have a look at their post-COVID 19 earnings release last month in May 2020. As the internet usage explodes, so will the use of the best technology which we believe Fastly has.

As the edge cloud grows in the future, so too will the hardware needs to support edge cloud. As large parts of the central cloud move towards the edge cloud to provide speed and reduce load on the central cloud, we see Fastly emerging as a winner in this secular trend of how internet will be structured going forwards!

Fastly can continue to power things in the background which would allow its clients (i.e entreprises/companies) to go back to focusing on running their businesses and not worrying about latency issues.

Fastly’s founder Artur Bergman founded his company in 2011 as the legacy providers were too slow, costly to maintain and difficult to manage. Today, edge computing is a tiny market but one that is expected to explode more than 10 fold over the coming 5 years! This is where we want to be and have an instrument that gives us maximum leverage to this new trend. For us today, this instrument is Fastly in the stock market.

Latest results

Fastly crushed the analyst estimates in its latest results post-COVID19 last month:

FY20 guidance: 42% YoY revenue growth vs 29% analyst expectations (note revenue growth is re-accelarating vs prior quarters)

Retention rate: over 99% (sticky customers!!)

Dollar based net expansion rate: 133% (i.e existing customers are spending 33% more money with them this year vs last year!)

Gross margins: 55%+

Those are all the key metrics to follow and their direction of travel to monitor if the secular growth story for Fastly is in tact!

The rest is just noise and story telling!

Key risks

Fastly currently has a 2 year P/S ratio of 9.5 which is “fair” in the current market environment for a company growing top line at c40% with a current market cap of around $4bn.

However, this author deliberately left out a discussion of valuations as ‘cheap’ can become cheaper and ‘expensive’ can become more expensive! Fastly’s valuation is not the main risk, the main risk is if its key metrics start trending in the wrong direction which would imply that it has starting facing competition from bigger cloud players or legacy players (Akamai).

So the main risk is not valuations but any emerging competition with better edge technology.

Also, this is a high growth stock and drawdowns of c50% is the price of admission to participate in the secular trend of a move towards edge computing and edge cloud.

Disclaimer: The author is long shares of Fastly at an average price of $23.45. None of this is investment advice or a substitute for doing your own fundamental research