Edge Security And Cloud Migration Will Shape Future Markets

Key Takeaways

• Growth in advanced security and edge computing solutions, along with cross-selling strategy, drives higher-margin revenue and increases customer retention.
  
• Expanded enterprise focus, international investment, and operating efficiency boost diversified recurring revenue and support continued margin improvement.
  
• Intensifying competition, revenue concentration risks, and escalating costs threaten Fastly's pricing power, margins, and ability to achieve sustained, profitable growth.

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.

• Ongoing adoption of advanced security solutions-including next-generation WAF, DDoS, and bot mitigation-positions Fastly to capitalize on rising enterprise demand for resilient edge security as cyber threats escalate, supporting future revenue growth and higher-margin service lines.
  
• The acceleration of cloud migration and edge computing, combined with Fastly's increased product velocity (especially in Compute and adaptive observability analytics at the edge), expands the company's addressable market and underpins durable multi-year revenue growth.
  
• Successful execution of a platform-based cross-sell and upsell strategy (with nearly 50% of customers now using 2+ products and these generating over 75% of revenue) boosts wallet share, increases net retention rates, and supports higher revenue per customer.
  
• Improved go-to-market alignment and expanded leadership, including segmented sales targeting enterprise clients beyond digital-native firms and investments in international expansion (particularly in APJ and Europe), diversifies and expands recurring revenue streams, reducing customer concentration risk and supporting top-line growth.
  
• Sustained focus on operating efficiency-with slower OpEx growth relative to revenue, disciplined cost controls, and improved cash collection-is driving operating leverage, setting the stage for continued margin improvement, a path to non-GAAP operating profitability, and stronger free cash flow.

Fastly Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Fastly's revenue will grow by 11.2% 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 -15.8% to the average US IT industry of 7.8% in 3 years.
• If Fastly's profit margin were to converge on the industry average, you could expect earnings to reach $70.1 million (and earnings per share of $0.37) by about May 2029, up from -$103.1 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 83.3x on those 2029 earnings, up from -25.5x today. This future PE is greater than the current PE for the US IT industry at 20.4x.
• Analysts expect the number of shares outstanding to grow by 6.17% 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.

Risks

• Fastly's core content delivery network (CDN) market is commoditizing and facing increasing competitive pressure from hyperscalers (Amazon, Google, Microsoft) that can bundle CDN, security, and compute into integrated solutions, which may compress Fastly's pricing power and negatively impact revenue and net margins over time.
  
• The company has a history of volatile security revenue growth and remains dependent on a concentrated set of large customers (top 10 still represent 31% of revenue), leading to continued risk around revenue stability and susceptibility to customer churn or declining usage, potentially resulting in revenue volatility and difficulty sustaining long-term earnings growth.
  
• Ongoing industry consolidation and the exit of smaller players like Edgio may be a short-term boost, but larger industry players could eventually erode Fastly's market share given their broader offerings and scale, impacting Fastly's long-term revenue and competitive positioning.
  
• Fastly's need for continual investment in R&D, network infrastructure, and expansion into new security and compute products could keep operating margins depressed; if revenue growth does not consistently outpace these costs, the company may continue to experience prolonged negative net margins and delayed profitability.
  
• Increasing regulatory scrutiny on data privacy, cross-border data flows, and compliance (especially in regions like the EU and APJ) could raise Fastly's operational complexity and costs, limiting international expansion and potentially constraining future revenue and margin improvement.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $24.11 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 $32.0, and the most bearish reporting a price target of just $18.0.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be $897.5 million, earnings will come to $70.1 million, and it would be trading on a PE ratio of 83.3x, assuming you use a discount rate of 9.0%.
• Given the current share price of $16.77, the analyst price target of $24.11 is 30.4% 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.