Unlike previous difficult quarters, Quickly (NYSE: FSLY) posted encouraging results in the third quarter. Indeed, following the global outage of the specialist in content delivery networks in June, major customers are returning traffic to the platform. And the company is advancing on its growth initiatives in cybersecurity and edge computing.
Management has announced an ambitious goal of generating $ 1 billion in revenue by 2025. Let’s see what that means for investors.
Short-term volatile results
Fastly’s core business consists of accelerating access to online services by hosting content as close as possible to users, thanks to its data centers in 31 countries. More recently, it has developed an edge computing offer to allow developers to build dynamic services on its decentralized servers.
Last year, coronavirus-induced stay-at-home orders boosted the company’s business, with people relying on efficient internet services for work and entertainment. And most importantly, the digitalization of business represents a centuries-old tailwind for the business.
However, Fastly has recently faced significant challenges that have offset its positive momentum. In 2020, its biggest client, social network TikTok, significantly reduced its business with Fastly due to geopolitical tensions. And in June, a global outage led some of the best customers to direct their traffic to competitors. As a result, Fastly’s revenue growth has slowed in recent quarters.
Fortunately for the company, the third quarter results show that operations are improving, thanks to the strength of the cybersecurity and advanced computing activities. Revenue increased 23% year-over-year to $ 87 million. And management expects annual revenue to be between $ 347 million and $ 350 million, up 19% year-over-year at midpoint.
Ambitious goal in the midst of strong competition
Management expressed confidence in the company’s revenue growth to the symbolic $ 1 billion mark by 2025, which equates to a strong compound annual growth rate (CAGR) of approximately 30% during this period.
To this end, the company will push the growth of its cutting-edge computing platform by offering trial versions and free offerings. The results of such an initiative remain to be seen, as the company will face stiff competition from its innovative, high-growth counterpart. Cloudflare (NYSE: NET). Research outfit Forrester Research ranked Cloudflare’s leading IT platform ahead of Fastly in terms of strategy and offering outlook. Fastly’s state-of-the-art computing platform remained higher ranked than Microsoft‘s, Amazon‘sand Akamai Technologies‘, but the comparison isn’t quite fair: These big players can take advantage of their upper scale and cross-selling opportunities to market their cutting-edge IT solutions.
Likewise, management is aiming to energize Fastly’s cybersecurity segment, with the goal of growing revenue 10-fold to around $ 400 million by 2025, which is an impressive 78% CAGR.
Of course, the company will capitalize on the age-old switch of enterprise infrastructure and applications to the cloud to offer its cybersecurity services. But again, it will face stiff competition in the crowded cybersecurity arena. For example, the computer research specialist Gartner positioned Fastly as a challenger in its magic quadrant for the protection of web applications and APIs (online services protection against external threats) in terms of execution capacity and comprehensiveness of vision, behind competitors Akamai, Cloudflare and Imperva.
Award for success
So, with shares of Fastly trading at 18.2 times and 6.3 times expected earnings in 2021 and 2025, respectively, the market appears to be banking on solid execution towards management’s ambitious long-term goals against a backdrop of strong competition.
However, the company has yet to upgrade its advanced computing and cybersecurity offerings to lead in these categories. In addition, profitability seems far away. Net losses more than doubled to $ 56 million in the third quarter from a loss of $ 24 million in the previous year quarter due to increased investment in research and development as well as sales and marketing to fuel growth.
Thus, investors must remain cautious. Even if Fastly manages to grow its revenue to $ 1 billion by 2025, the potential for the stock price to rise will depend on flawless execution beyond that target.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.