How Does Fastly Make Money And Should I Invest?

Fastly (NYSE: FSLY) has seen its stock price surge over 365% since making its stock market debut in May 2019. The company, appropriately named, helps cloud-based organizations reduce lag time and provide real-time transactions for users. It is this technology that enables apps like ByteDance's Tik-Tok, Fastly's former biggest client -- more on that later -- to provide seamless video clips to its users. Valuable technology, no doubt, but how does Fastly monetize it, and is it a buy? 

What is Fastly?

Fastly was founded in 2011 by developer Artur Bergman and after 8 years of growing funding, the company went public, at which time Bergman stepped down as CEO and was replaced by Joshua Bixby. The company's main offering is its edge cloud content delivery network (CDN), which is an infrastructure that is on the edge of the network, and therefore closer to end-users. It does this with clusters of caches, called Points of Presence (POP), in major population regions around the globe. This helps to significantly reduce latency and improve high-level performance so that when you choose a song on Spotify or click on a video on Netflix, there isn't a delay or buffer; additionally, when businesses use Stripe, the transaction is instantaneous, all thanks to Fastly.

Fastly's business model

According to the company's last quarterly report, Fastly has 2,047 customers, of which 313 are considered enterprise-level (generate more than $100,000 annually). The company has 72 POPs spanning 55 markets globally. It mainly generates revenue from the sale of its services to customers executing non-cancellable contracts for which the standard term is one year. The majority of its revenue comes from enterprise clients; in fact, according to Fastly's last quarterly report, its enterprise customer revenue was nearly 90% of its total revenue. New customer acquisition isn't the only way the company makes its money.

How does Fastly make money?

The company is a big advocate of expanding its offerings to existing customers and evidence of this is in its Dollar Based Net Expansion Rate (DBNER), which is currently at 147.4% for the trailing 12 months of the last quarter; that's up nearly 10% from a year ago. This number represents how much an existing client's revenue grows year-over-year (YoY). Another metric to consider in regards to existing customers is Fastly's Net Revenue Retention (NRR) of 121.5%, which is the percentage of recurring revenue retained from these clients.

The company charges various flat rates (depending on region) per gigabyte of data. Fastly offers a high-quality, secure product that even Amazon uses instead of its own CloudFront platform. As for TikTok, the company reduced its usage of Fastly's services when Trump expressed his opposition to the organization, but with Biden in office, I expect usage to resume to at least previous levels. Fastly will continue to grow as it has a competitive advantage over providers like Akamai and Cloudflare in that it's faster, more efficient, and has a platform designed for large enterprises.

What's next for Fastly?

Fastly's most exciting recent development is in the forthcoming launch of its 'Compute@Edge' platform, which will allow developers to build more advanced edge applications with greater security and new levels of performance. The platform will also support more programming languages rather than be limited to the subpar Varnish Configuration Language (VCL) currently used. This will no doubt assist in Fastly's future sales.

Is Fastly a good investment? 

Fastly is not profitable and probably won't be for a while. Its stock is seeing spectacular gains because investors are well aware of the company's potential market. Currently, less than 10% of enterprise-generated data is created and processed at the edge; Gartner predicts that by 2025, that number will grow to 75%. Enterprises are expected to spend an average of 30% of their IT budgets on cloud computing in the next two years. Fastly's market opportunity is expected to reach $35 billion by next year and it offers a product that is absolutely vital in today's high-speed internet as more devices become connected to the Internet of Things (IoT). As a company with a strong competitive advantage, Fastly stands to benefit.

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