Fastly: Turnaround With Solid Enterprise Customer Growth

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Fastly (NYSE:FSLY) is simply a contented transportation web [CDN] supplier which enables accelerated and unafraid website/app capacity crossed nan globe. The institution fundamentally operates by storing a "cached" type of websites crossed a world footprint of information centers, truthful it tin beryllium accessed successful accelerated time. The business has much than 2,900 customers pinch galore well-known brands from Reddit to Stripe and moreover nan New York Times. Fastly besides is nan No. 1 rated Gartner leader successful CDNs (by customer reviews) pinch 4.9 stars retired of 5. This is overmuch greater than competitor Akamai and Cloudflare which person 4.7 and 4.6 stars retired of 5, respectively. Interestingly capable this is contempt Cloudflare having a much costly valuation connected a value to income ratio (I will talk much connected this later).

CDN Provider (Gartner)

Fastly has precocious reported beardown results for the 4th fourth arsenic it hit some apical and bottommost statement maturation estimates. In this station I'm going to break down its 4th fourth financials and valuation utilizing my discounted rate travel exemplary and forecasts.

Data by YCharts

Fourth Quarter Financials

Fastly reported beardown financial results for nan 4th fourth of 2022. Its gross was $119.3 cardinal which surpassed expert estimates by $4.77 cardinal and accrued by a coagulated 22% twelvemonth complete year. This was driven by dependable customer maturation of ~5% twelvemonth complete year. Notable wins included nan Duolingo connection learning app, Civitatis, an online recreation provider, a celebrated online market transportation institution and galore more. We tin spot consecutive distant that Fastly's gross ground is now highly divers crossed aggregate industries and ~79 markets. This is simply a affirmative for stability, particularly fixed nan institution mislaid TikTok arsenic a awesome customer successful 2020, which butchered nan banal value astatine nan time.

Customer Wins (Q4,22 report)

Another affirmative for Fastly, is I noticed its endeavor customer count has accrued from 445 to 493, aliases 10.79% twelvemonth complete year. It's a awesome affirmative to spot its endeavor customers increasing astatine a faster levels than its wide customer base. This is because larger organizations (Enterprises) thin to beryllium much "sticky" by quality pinch a mature, unchangeable business. I person taken nan clip to create a unsocial floor plan plotting nan endeavor customer growth, arsenic Fastly hasn't provided charts successful its earnings. From nan ray reddish trendline you tin spot this is intelligibly upwards.

Fastly Enterprise Customers (Created by writer Deep Tech Insights)

As personification who has first-hand acquisition moving pinch enterprises from a "digital transformation/cloud" perspective, I cognize they thin to person ample bureaucracy's and tin beryllium slow to change. This intends they tin beryllium difficult to motion up initially, but erstwhile you fastener them successful arsenic a customer, precocious retention is expected. For example, Fastly reported an wide nett dollar retention complaint of 119% successful nan trailing 12 months, which is up 1% twelvemonth complete year. This intends customers are staying pinch nan institution and spending much done product/bandwidth growth, moreover contempt nan "recessionary" backdrop. As its endeavor customers grow and economical conditions improve, I expect this fig to summation for its wide customer base.

Large organizations connection immense relationship description opportunities crossed aggregate parts of nan business. For example, Fastly reported its Enterprise customer mean walk (last 12 months) jumped from $704,000 successful Q4,21 to $782,000 by Q4,22, aliases 11% twelvemonth complete year. For other clarity, I person plotted a chart of nan endeavor customer walk and extrapolated retired nan caller maturation rate, but somewhat little astatine 10.9% twelvemonth complete twelvemonth for my forecast (dotted statement column). Utilizing this forecast I estimate 868 endeavor customers by Q4,23, arsenic per nan existent trend. I will talk much connected this successful nan "valuation and forecasts" section.

Enterprise Customer Spend (Created by writer Deep Tech Insights)

Notable Product Improvements

In bid for a technology/software institution beryllium successful, they must continually put into infrastructure improvements and capacity. In this case, Cloudflare has accrued its Global Network Capacity from 184 TB/Sec to 252 TB/Sec aliases a accelerated 36.96% twelvemonth complete year. This is awesome to spot and should supply some bid of mind and amended performance, for its customers, particularly those successful nan endeavor which often request strict SLA's aliases "Service Level Agreements."

The institution besides has continued to innovate connected its information beforehand and precocious achieved Payment Card Industry Data Security (PCI DSS) compliance. This whitethorn look for illustration a mini portion of news, but this is huge. PCI DSS is simply a modular related to nan unafraid retention of in installments paper accusation which includes encryption, entree controls, etc. Thus having compliance pinch this standard, intends Fastly tin beryllium adopted by much e-commerce and costs companies overmuch easier, expanding its full addressable market.

On a much method beforehand nan institution has improved its Web Application Firewall, aliases WAF, pinch automatic provisioning via Terraform. Web Application Firewalls thief pinch nan prevention of DDoS aliases Distributed Denial of Service attacks and are captious pieces of cybersecurity infrastructure. The integration pinch Terraform intends unreality adaptability is overmuch easier. Given nan number of world cyber attacks increased by an oculus watering 38% twelvemonth complete twelvemonth successful 2022, and unreality information is becoming vital, this was a awesome merchandise improvement.

Margins and Balance Sheet

Moving onto profitability, nan institution reported a gross separator [GAAP] ground summation of 380 bps 4th complete quarter, which was a affirmative sign. In addition, its GAAP operating losses person started to constrictive from antagonistic $56.65 cardinal reported successful Q4,21 to antagonistic $48.46 cardinal by Q4,22. This is simply a affirmative motion and indicates operating leverage arsenic nan business scales. Its operating expenses did summation somewhat from $106.4 cardinal to $111 cardinal aliases 4% twelvemonth complete year, but gross grew astatine a faster rate. In addition, its G&A expenses was somewhat lower/flat, while its R&D expenses accrued by ~6% twelvemonth complete year. I don't judge this is simply a bad sign, arsenic nan institution must continually innovate to enactment up of nan title and caller merchandise improvements are testament to this. Overall EPS was antagonistic $0.38, which hit expert expectations by antagonistic $0.10.

Fastly expenses (Q4,22 report)

Fastly has a beardown equilibrium expanse pinch $518 cardinal successful rate and short-term investments. The institution does person full indebtedness of ~$833.5 million, but nan mostly of this ~$704 cardinal looks to beryllium agelong word debt. I judge this is manageable, particularly fixed nan company's losses are narrowing.

Valuation and Forecasts

In bid to worth Fastly, I person plugged its latest financial information into my discounted rate travel valuation model. I person forecast 16% gross maturation for "next year," which refers to nan afloat twelvemonth of 2023. This is aligned pinch guidance guidance and I judge prudent based upon nan forecasted "recession" which I will talk much connected successful nan "Risks" section. In years 2 to 5, I person forecast a overmuch faster maturation complaint of 22% per year. This whitethorn look optimistic, but it's in-line pinch nan 22% maturation complaint reported successful Q4,22 and slower than nan staggering 45% gross maturation reported successful 2020. I forecast this maturation complaint to beryllium driven by improving economical conditions, nan expanding request for Web information and capacity and continued description into nan enterprise.

Fastly banal valuation 1 (Created by writer Deep Tech Insights)

To summation nan accuracy of my model, I person capitalized R&D expenses which has boosted nett income. In addition, I person forecast a antagonistic 10% operating separator for adjacent year. This is based upon management's guidance astatine nan midpoint and would correspond an summation from nan antagonistic 18% reported successful 2022. Management has made it a strategical privilege to attraction connected costs ratio and arsenic mentioned anterior its wide and administrative expenses person been level twelvemonth complete year. I person forecast a 23% operating separator complete nan adjacent 9 years. This is optimistic but based upon nan mean of nan package industry. Given Fastly has built retired its infrastructure footprint extensively and has a ample endeavor customer base, pinch galore description opportunities, this is not impossible.

Fastly banal valuation 2 (created by writer Deep Tech Insights)

Given these factors I get a adjacent worth of $17.14 per share, nan banal is presently trading astatine $15.90 per stock astatine nan clip of penning and frankincense it's ~7.24% undervalued.

As an other datapoint, Fastly is trading astatine a value to income ratio = 4.47, which is ~68% cheaper than its five-year average. The banal besides is trading substantially cheaper than celebrated competitor Cloudflare (NET), which trades astatine a value to income ratio = 15.94.

Data by YCharts

Risks

Recession/Lower Demand

Many analysts have forecast a recession successful 2023 and we're already seeing a cyclical diminution crossed nan exertion and e-commerce sectors. As Fastly charges based upon web "delivery traffic" pinch up to 3TB and up to 10TB packages, I judge nan institution will look little request successful 2023 which I person reflected successful my exemplary forecasts.

Final Thoughts

Fastly has faced reliable headwinds since its nonaccomplishment of TikTok arsenic a customer successful 2020. However, nan institution has continued to turn its halfway customer guidelines pinch focused maturation successful nan lucrative endeavor market. Its precocious retention and improving profitable is besides a awesome positive. Given nan banal is somewhat undervalued successful my exemplary and trading overmuch cheaper than competitors specified arsenic Cloudflare, while being highly rated successful Gartner reviews, I judge nan banal has each nan ingredients of a turnaround story.

Senior Investment Analyst for Hedge Funds. Interviewed Hedge Fund Managers and CEO's. Investment Strategy: Focus connected Deep Dive Valuation, G.A.R.P (Growth astatine a Reasonable Price). Masters successful Equity Valuation, 755+ Companies Analysed.