Fastly (FSLY) on turnaround path with focus on customers, portfolio

Fastly, Inc. (NYSE: FSLY) has been expanding its footprint in edge computing, a largely untapped tech segment that got a boost from the mass shift to digital platforms during the pandemic period. Currently, the San Francisco-based tech firm is busy strengthening its portfolio with new offerings and through strategic acquisitions.

Recent data shows that the cloud computing service provider benefited from the digital transformation, but that was not enough to turn the business profitable. The company that went public more than a year ago is yet to generate profit consistently. After a modest recovery earlier in the year, the bottom-line remained in the negative territory in the most recent quarter. Analysts do not expect a turnaround when Fastly reports its fourth-quarter results on January 27, though they see a marked increase in revenues.

In the absence of a proper turnaround strategy, market watchers are slightly skeptical about the stock’s prospects and predict a moderation in value in the twelve-month period. Investors would prefer to remain patient until a clear picture emerges, considering the pandemic-related uncertainties. The majority of analysts following the stock recommend holding it.

Customer Base

Fastly witnessed a decline in traffic in recent months, in part due to the ban on China-based social networking platform Tik-Tok – which accounts for about 10% of the company’s revenue. That is expected to remain a headwind in the final months of the fiscal year. However, new customer wins and the growing adoption of digital services across industries should put the business on a growth trajectory in the long term.

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Referring to the loss of business due to the new regulation, Fastly’s chief executive officer Joshua Bixby said during his interaction with analysts at the most recent earnings conference call, “One of our core values is to focus on our customer, and we intend to fully support this customer unless and until we are prohibited from doing so. We are prepared to accept additional traffic from this customer if conditions enable it to return. However, if it becomes clear that we should no longer support this customer, we believe the reserve capacity for this customer can be reallocated over the medium to long term with a traffic mix that is consistent with our gross margin objectives.”

Road Ahead

Buoyed by the strong customer addition, the management expects more and more clients/developers to migrate to modern network architectures, taking a cue from the structural changes brought about by the virus crisis. Those tailwinds will be complemented by contributions from cybersecurity firm Signal Sciences, which joined the Fastly fold earlier this year at a time when online security is considered crucial for running businesses.

The company’s extensive network that facilitates the easy distribution of digital content, especially videos and photos, puts it in a league of its own. Fastly’s competitors include tech majors like Amazon (AMZN) Google (GOOG) and Cisco (CSCO).

Elusive Profit

In the third quarter, net loss narrowed to $0.04 per share from $0.09 per share last year but missed analysts’ forecast. Meanwhile, revenues surged 42% annually to $71 million, in line with estimates.

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Read management/analysts’ comments on earnings reports

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Shares of Fastly slipped to a four-month low in October after its third-quarter earnings missed estimates. However, they picked up momentum since then and crossed the $80-mark once again. The value has more than doubled in the past six months.