International Expansion And Product Launches Will Broaden Customer Base

Key Takeaways

• Fastly's diversification and geographic expansion strategy aims for stable revenue growth and broadens customer acquisitions in emerging markets.
  
• Investments in product development and a refined go-to-market strategy enhance competitive edge, leveraging higher-margin products for improved net margins and operational efficiency.
  
• Fastly faces challenges from demand headwinds, financial health risks, strong competition, and regulatory uncertainties, potentially impacting revenue growth and profitability targets.

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.

• Fastly's strategy to diversify its revenue base by reducing reliance on its top 10 customers indicates an operational shift that could lead to more stable and predictable revenue growth. This is expected to increase overall revenue growth as reliance on large customers decreases and the company broadens its customer base.
  
• The company's expansion into new geographic regions, with a focus on Latin America, India, EMEA, and APAC, presents opportunities for new customer acquisitions and increased sales. This geographic diversification is aimed at boosting revenue growth in these emerging markets.
  
• Fastly's investment in cross-selling opportunities and new product introductions, such as its comprehensive security portfolio and AI Accelerator, positions the company to increase revenue from existing customers while also attracting new ones. This strategy is expected to improve net margins as it leverages higher-margin products.
  
• The company's refined go-to-market strategy, including specialized resources for security and segmentation of enterprise versus mid-market sales efforts, is designed to drive more efficient customer acquisition and long-term revenue growth. These approaches are likely to impact earnings positively as they streamline cost of sales and improve operational efficiency.
  
• Fastly's focus on improving development processes and accelerating its product road map, particularly in security and compute, is anticipated to enhance the company's competitive edge. By increasing its feature velocity and time-to-value for customers, Fastly aims to drive accelerated revenue growth and improve customer retention, thus boosting both revenue and net margins.

Fastly Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Fastly's revenue will grow by 6.3% 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 -29.1% to the average US IT industry of 8.0% in 3 years.
• If Fastly's profit margin were to converge on the industry average, you could expect earnings to reach $52.0 million (and earnings per share of $0.32) by about April 2028, up from $-158.1 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 27.3x on those 2028 earnings, up from -4.8x today. This future PE is lower than the current PE for the US IT industry at 33.9x.
• Analysts expect the number of shares outstanding to grow by 4.17% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.22%, as per the Simply Wall St company report.

Fastly Future Earnings Per Share Growth

Risks

• Fastly's management has identified demand headwinds from some of its largest customers, which in previous quarters negatively impacted revenue growth and could pose continued risks to revenue if similar issues persist.
  
• Although Fastly has seen improvements in cash flow from operations, it remains negative, indicating ongoing financial health risks, which could impact earnings if the company does not achieve profitability.
  
• The company operates in a competitive market with larger rivals growing faster, especially in the security segment, potentially affecting Fastly’s ability to capture market share and significantly grow revenues in that space.
  
• Fastly's international expansion plans, while strategic, involve entering lower-margin markets which could impact overall gross margins and net margins, hence posing challenges in achieving profitability targets.
  
• The company faces significant regulatory uncertainty with a key customer, TikTok, which could impact revenue growth if traffic is limited by legislation, particularly if it occurs beyond the first quarter of 2025.

Valuation

• The analysts have a consensus price target of $6.812 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 $652.1 million, earnings will come to $52.0 million, and it would be trading on a PE ratio of 27.3x, assuming you use a discount rate of 9.2%.
• Given the current share price of $5.32, the analyst price target of $6.81 is 21.9% higher.
• 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.