One of the best investments you can make is to hold quality growth stocks over the long term. Companies that are part of a rapidly expanding addressable market and are poised to gain traction among their customer base generally derive outsized gains and beat broader market returns.
Here, we take a look at one such growth stock Fastly Inc (NYSE: FSLY) to see if it should be part of your portfolio in 2021 and beyond.
An overview of Fastly
Fastly operates an edge cloud platform that processes, serves, and secures enterprise applications in the U.S. and other international markets. The edge cloud is a vertical of IaaS (Infrastructure-as-a-service) that allows developers to build and secure digital experiences. It offers a programmable platform designed for web and application delivery.
Fastly also provides edge security solutions including DDoS protection, transport layer security, compliance services, and edge web application firewall. It serves customers a range of verticals including digital publishing, media, and entertainment, online retail, technology, fintech, and travel.
Fastly went public in mid-2019 and has since doubled in market value. However, despite its stellar performance FSLY stock is down 62.5% from its record high, making it a solid contrarian bet.
Recent Q1 results
In the first quarter of 2021, Fastly reported revenue of $85 million which is an increase of 35% year over year. Its adjusted net loss widened to $14 million or $0.12 per share compared to the prior-year loss of $6 million. While Fastly’s revenue was in line with consensus estimates, analysts expected the firm to post a loss of $0.11 per share in Q1.
Fastly raised its full-year guidance for 2021 and expects sales between $380 million and $390 million which suggests revenue growth of over 33% year over year at the midpoint. However, Fastly forecast Q2 sales between $84 million and $87 million in Q2 which was lower than average Wall Street estimates.
FSLY explained it typically signs customers in the first two quarters who then ramp up on the company’s platform in the second half of the year. Historically, its usage expansion has been slower in Q2 as people generally spend time outside and not on devices.
If you exclude Signal Sciences, Fastly ended the March quarter with 2,207 customers, up from 2,084 customers at the end of 2020. Its enterprise customers also increased to 336, up from 324 in this period.
During the earnings call, Fastly’s CEO confirmed, “We saw several customers wins across hi-tech, e-commerce, digital publishing, financial services, cryptocurrency, and healthcare, including human security, a leading bot mitigation provider relied on by many of the Internet's largest advertising platforms or enterprises, a leading provider of multi-layered network switches and software-defined networking solutions and a leading automotive insurance SaaS provider, among others.”
In addition to an increase in customer demand, FSLY also executed its land-and-expand strategy among existing customers. So, its average enterprise customer spending rose to $800,000 in Q1, up from $782,000 indicating a strong dollar-based net retention rate of 139%.
What next for FSLY stock?
Fastly is optimistic its edge cloud platform can seamlessly combine delivery, edge computing, and security providing the company with a “tremendous market opportunity”.
The company is valued at a market cap of $5.6 billion and Wall Street expects Fastly to increase sales by 31.8% to $383.33 million and by 27% to $486.5 million in 2022. Despite this growth in top-line Fastly’s loss is expected to expand from $0.18 per share last year to $0.43 per share in 2021. It means analysts expect the company to post a loss of $45.6 million in 2021 which is 11.8% of sales. In 2020, total loss accounted for just 6.6% of total sales.
FSLY stock is trading at a forward price to sales multiple of 14.6x which is steep for a company that is still posting an adjusted loss. However, analysts expect the stock to touch $57.33 in the next 12-months which is 20% above its current trading price.
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