Edge Cloud Consolidation Will Temper Overvaluation And Spur Recovery

Key Takeaways

• Optimism around market growth and new products may be overblown, as pricing pressure, cautious adoption, and high costs pose risks to margins and profitability.
  
• Industry consolidation and aggressive competition from larger players could weaken Fastly’s pricing power and further hinder long-term margin improvement.
  
• Expansion in security and edge computing, successful enterprise diversification, operational efficiencies, and improved pricing dynamics position Fastly for sustained revenue growth and margin improvement.

Catalysts

Operates an edge cloud platform for processing, serving, and securing its customer’s applications in the United States, the Asia Pacific, Europe, and internationally.

• Investors may be overestimating Fastly’s ability to sustain high revenue growth rates, as the digital transformation and global data consumption trends are positive for the addressable market, but the company’s management remains cautious in guidance due to persistent pricing declines and macro uncertainty, which could ultimately pressure both revenue growth and gross margins.
  
• The increasing shift of workloads to edge computing and demand for integrated edge cloud platforms does favor Fastly’s positioning, but ongoing consolidation in the cloud and edge space could strengthen larger competitors and diminish Fastly's pricing power, potentially leading to long-term margin compression.
  
• While Fastly is expanding its security and compute product portfolio, adoption of these higher-margin offerings remains early and slow; if investors are pricing in rapid acceleration, actual revenue and earnings growth may not materialize as expected due to the length of sales cycles and cautious customer adoption patterns.
  
• Although the company is growing its enterprise customer base and reducing revenue concentration, it continues to operate at a net loss and faces high operating costs; expectations of near-term profitability may be premature, putting downward pressure on future net margins and delaying improvement in earnings.
  
• Recent stabilization in CDN pricing is contributing to optimism, but the industry remains susceptible to further commoditization and potential vertical integration by hyperscalers, which could increase competitive pressure, drive prices—and Fastly’s gross margins—down, and negatively impact long-term financial performance.

Fastly Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Fastly's revenue will grow by 7.1% annually over the next 3 years.
• Analysts are not forecasting that Fastly will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Fastly's profit margin will increase from -27.7% to the average US IT industry of 6.4% in 3 years.
• If Fastly's profit margin were to converge on the industry average, you could expect earnings to reach $43.4 million (and earnings per share of $0.26) by about June 2028, up from $-153.8 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 34.1x on those 2028 earnings, up from -7.6x today. This future PE is greater than the current PE for the US IT industry at 30.1x.
• Analysts expect the number of shares outstanding to grow by 4.47% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.96%, as per the Simply Wall St company report.

Fastly Future Earnings Per Share Growth

Risks

• Fastly is experiencing significant growth in high-margin, recurring revenue streams by expanding its security portfolio (WAF, bot mitigation, DDoS protection), which remains in early stages of adoption across its large customer base, providing a long runway for ARR and margin improvement. (Likely positive impact on revenue and gross margins)
  
• The company is showing accelerating customer acquisition in strategic enterprise verticals (travel, technology, financial services, retail), and is successfully cross-selling multiple product lines, resulting in greater revenue diversification and a record-high RPO up 33% year-over-year. (Likely positive for revenue stability and long-term earnings)
  
• Fastly’s compute and emerging products are driving rapid growth (64% year-over-year), benefiting from secular demand for real-time, data-intensive digital experiences, and edge computing, which could unlock higher usage and monetization potential as more enterprises move to cloud-native architectures. (Likely positive for top-line growth and addressable market)
  
• Operational improvements, including cost optimization, improved sales execution, and shifts to higher-touch customer engagement, have already led to positive free cash flow for the first time in eight quarters and project achieving operating profit in the second half, signaling reduced risk of future net losses. (Likely positive for earnings and cash flow)
  
• The stabilization and improvement in pricing dynamics (returning to high teens percent annual price declines from low 20s) after market consolidation, alongside share gains from weaker competitors’ exits (e.g., Edgio), suggest Fastly could sustain or improve gross margins while capturing additional market share. (Likely positive for gross margins and revenue growth)

Valuation

• The analysts have a consensus price target of $6.929 for Fastly based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $9.0, and the most bearish reporting a price target of just $5.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $681.6 million, earnings will come to $43.4 million, and it would be trading on a PE ratio of 34.1x, assuming you use a discount rate of 9.0%.
• Given the current share price of $8.08, the analyst price target of $6.93 is 16.6% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.