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Shareholders of Fastly (NYSE: FSLY) seen all. The stock is a pandemic winner, largely driven because of its meme-stock status. That meme-status was lost when the company lost most of its business from TikTok, whose overall growth has been rapidly declining since then. The stock is now trading its IPO price is almost the same, and investors may be wondering if it’s a good metaverse stock. I discuss the appreciation and long -term outlook on stock trading at this low level.
FSLY Stock Price
FSLY priced its IPO at $ 16 per share in 2019 and closed its first day of trading 50% higher at $ 23.99 per share. Optimism makes sense, as content delivery networks offer a way to directly invest in the growth of the internet. That optimism eventually turned to euphoria as the stock hit just under $ 129 per share in late 2020. It’s been down since then.
Priced at $ 18 per share, the stock is now nearly higher than its IPO price despite three years worth of developments. Buy the stock?
FSLY Stock Key Metrics
We can best see financial developments by analyzing results from several quarters. We can see below that FSLY is growing revenues at 26% consecutively and 49% year-on-year in the second quarter of 2020. That growth slowed to 12.7% year-on-year and 18.3% year-on-year last year. quarter.
Fast 2021 Q4 Supplemental
The gross margin is trending in the wrong direction. The gross margin climbed to 60.2% in the second quarter of 2020 and reached 50.9% in the last quarter. Furthermore, the company has difficulty with profitability, as the company is taking money and not making a profit even on an adjusted EBITDA basis. These financial results are unusual considering the continued growth and solid cash flow seen in leading dog Cloudflare (NET). What is the issue?
We can see below that while the dollar-based net expansion rate stood at 121% in the most recent quarter, the net retention rate was at only 107%. Furthermore, customer growth is very slow at only 20.6% per year.
Fast 2021 Q4 Supplemental
Hopefully, FSLY expects consecutive revenues to stop next quarter at up to $ 100 million. FSLY expects full -year revenue growth to stand at 15.7%.
Fast 2021 Q4 Supplemental
The slowing growth rate is a red flag considering that NET has led for 42% revenue growth despite having a significantly larger revenue base.
Is It Fast Investing in the Metaverse?
This is an interesting question. While FSLY does not directly invest in the metaverse, its content delivery network benefits because more data is sent online. So in some sense when FSLY invests in its business, it also invests in the underlying metaverse infrastructure. That being said, the company does not appear to be a direct investor in the metaverse.
Is FSLY a Metaverse Stock?
FSLY could be a metaverse stock considering that the metaverse is likely to be highly dependent on CDNs such as FSLY. That said, the Roundhill Ball Metaverse ETF (METV) no longer believes that FSLY is a metaverse stock. As of June 30, 2021, FSLY has a 3.9% position in the ETF. As recently as December 31, 2021, FSLY had a 2% position in the ETF. Currently, FSLY is no longer an ETF position. The ETF has a position in the NET, but that stock represents only 1.3% of total assets. It is possible that the ETF manager wants to focus more on names that are directly related to the metaverse.
What is Fastly’s Long -Term Outlook?
Consensus estimates call for revenue growth to slowly accelerate until 2025, when it will reach a maximum of 30%.
Looking for Alpha
Those estimates seem aggressive, but there’s a reason why analysts are so optimistic. In the third quarter conference call of 2021, management guided on $ 1 billion in revenue by 2025. I noticed that consensus estimates only required $ 730 million of revenue back then. To reach $ 1 billion in revenues, FSLY will need to grow at a 35% cumulative annual rate from 2023 to 2025. Management says it can achieve this goal by investing more aggressively in developers as it should. better compete against the competition. When asked if growth would be organic or inorganic in the same specified conference call, management did not provide a definitive answer although it was mentioned that they did not have any immediate acquisition plans.
Is FSLY Stock a Buy, Sell, or Hold?
My view is that the 2025 guidance looks very ambitious, if not too optimistic. This is something when tech peer ServiceNow (NOW) is heading for $ 15 billion in revenue by 2026 that will signal slightly decelerated growth over the next five years. But FSLY is guiding for growth in speed up significant and to maintain that acceleration until 2025. I understand any motivation to believe in that guidance. The stock is trading cheaply at 5.4x sales – far less than 38x sales on the NET. Assuming the company reaches 30% long -term net margin, the stock is only trading at 18x long term earnings power and earnings are still growing in the double digit clip. If the company achieves the 35% expected annual growth rate, it is likely that the bulk will expand to 20x the sales level (NET trades at 38x sales versus 42% growth), and the stock will be home run from current prices.
But there is good reason to doubt. Why should investors believe that FSLY will achieve accelerated growth from 15.7% in 2022 to 35% next year? In my view, it seems more likely that competitors like NET will aggressively take market share, making it difficult for FSLY to maintain its 15.7% growth rate in 2023. It will be easier to maintain the status quo (e.g. in NET) than it is to modify the underlying software (as in FSLY). The stock is likely to deliver an incredible return if management can provide guidance. But what if they don’t? I see the stock trading at up to 1.5x the price to earnings growth ratio (‘PEG ratio’), which can be optimistic considering the slow growth rate and incredible margins. The stock offers less than 50% upside on that target, which in my view doesn’t seem to be enough considering the risk-reward profile. FSLY’s balance sheet is not terrible, as it has $ 1.1 billion in cash and marketable securities compared to $ 933 million of long-term debt. That debt primarily consists of a 0% convertible note due in 2026 with a conversion price of $ 102.80 per share. Due to the high conversion price, this debt essentially acts as 0% debt for the next four years. The company burned $ 38 million of cash in 2021 and thus should have enough cash on hand for some time, but if profit margins don’t improve over the next few years, the company may need to address 2026 maturity by issuing high-yield debt, which will greatly raise the risk profile of the business. That explains the simple bear thesis for tech stocks like FSLY: if you win, then profitability can be tolerated for many years but if you lose, profitability can lead to debt, dilution and the stock will eventually become a financial solvency concern. I doubt management will achieve the guidance in 2025 and the stock will not be priced low enough to make the leap of faith. I rate shares “hold” or “avoid” because there are better opportunities elsewhere in the sector.