Is Fastly (FSLY) A Buy Now?

8/3/2023

$FSLY jumped ~21%+ after its earnings call on Wednesday after hours.

The stock has been a poor investment, down ~4% compared to its IPO price. But there is a reverse in the direction with a 45% jump in the last three months.

Is the stock on its way to the all-time high of $100+ or beyond? Let's find out!

Unexpected Stuff From Earnings Report

Based on Coatue's Rule 200, FSLY still needs to be in better shape.

Revenue growth + Gross margin + Operating margin + 12M Retention
> 20% + 52.3% - 40% + 116% = 148%

-- > Negative operating margin is a drag, while revenue growth is not as fast as it used to be:
Note: Coatue uses Rule 200 for fintech. I use it for all SaaS/Subscription stocks.

The company added several new executives. We need to see how they perform in the upcoming quarters.

Fastly's Topline

Leading Indicators:

The total customer count went down by 28 (out of 3K+),
A few enterprise customers are added (3),
The net retention rate of 116%.

Leading indicators are mostly positive. So no wonder revenue grew 20% Y/Y.

Score: Fair to Good -- need to see faster growth for such as small company (only $123M in quarterly revenue).

Fastly's Bottom Line

Gross margin went up to ~57% (Great!) - This is due to higher cross-sell across the customer base.
Negative operating loss, although it has shrunk by $20M+

Score: Fair -- directionally moving toward profitability.

Fastly's Balance Sheet

~ $400M+ cash & cash equivalent
vs. ~$470M+ in total debt

Some debt concerns. But there is good news:
FSLY uses cash to buy its long-term debt at a discount to par value and saves on overall expenses.

Score: Fair -- watch for debt reduction.

Fastly's Free Cash Flow

Turned positive Free Cash Flow, thanks to positive operating cash flow, which in turn is the result of smaller operating loss.

Score: Fair -- Good direction and monitoring for expansion.

Fastly's Valuation Feasibility

P/S of 4.5X, much smaller than peers.
To grow sales by 4.5X:

In 5 years, it needs 35% per year revenue growth
In 10 years, it needs 16% per year revenue growth

So the valuation isn't crazy, especially if the company maintains its 20%+ revenue growth or generates profit.

Score: Fair to Good -- watch for earnings and rev growth.