fastly‘s share price (fsly -0.41%) fell 18% on May 5 after the cloud computing service provider released its first-ever earnings report. trimester.
Its first-quarter revenue rose 21% year over year to $102.4 million, beating analyst estimates by $3.4 million. however, its adjusted net loss widened from $13.6 million to $18.0 million, or $0.15 per share, missing analyst expectations by a penny. Under generally accepted accounting principles (GAAP), its net loss widened from $50.7 million to $64.3 million.
Reading: Should i sell fastly stock
Those headline numbers were mixed, but fastly shares are now trading about 13% below their IPO price and nearly 90% below their all-time high. Should investors consider buying some shares of this falling growth stock?
what does it do quickly?
fastly’s platform hosts a content delivery network (cdn) that accelerates the delivery of digital media to applications and websites. It does this by caching copies of that content on “edge” servers, which are physically located closer to users than the “origin” servers. it also includes bot blockers, cybersecurity tools, and other services on its platform.
That approach is innovative, but many other companies, including cloudflare (0.58% net) and akamai, also offer similar cdn services. Additionally, Fastly’s reputation was tarnished by a major service outage last June that caused several major customers to leave.
how fast is it growing fast?
fastly’s revenue grew 45% in 2020 (driven in part by the acquisition of signal sciences), but rose only 22% to $354 million in 2021. its growth was severely curtailed by the interruption of service during the second quarter, but gradually recovered during the following three quarters:
data source: quickly.
Unfortunately, fastly continues to grow at a much slower pace than cloudflare, which grew revenue 52% to $656 million in 2021 and another 54% year-over-year to $212 million in Q1 2021. 2022. cloudflare’s ability to grow faster than fast while generating more than twice the revenue raises a bright red flag for the underdog.
quickly finished the first quarter with 2,880 customers, which was 30% growth from the prior year, but only 3% growth from the fourth quarter. Their average client spend decreased 10% year-over-year to $722,000 (due to the integration of Signal Sciences’ lower-value clients), but still improved 3% sequentially. Those numbers suggest fastly’s growth is gradually leveling off, but its adjusted gross margins are still crumbling:
data source: quickly.
During the conference call, CFO Ron Kisling said that fastly’s gross margins shrank as it implemented its next-generation architecture, expanded its network capacity and accelerated its investments to “proactively address supply chain constraints. Unfortunately, Kisling expects its gross margins to drop “a couple of hundred basis points” for the full year.
By comparison, cloudflare’s adjusted gross margin increased 110 basis points year over year to 78.7% in the first quarter. Those higher margins, coupled with its much stronger revenue growth, indicate that Cloudflare has much more pricing power and scale than it is quickly moving into the CDN market.
Your retention rates are declining
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quickly measures the strength of your platform with its 12-month net retention rate (nrr) and dollar-based net expansion rate (dbner). both metrics exceeded 100% in Q1, but fell sequentially and year-over-year:
data source: quickly.
kisling admitted that both metrics, which look at the last 12 months, still “reflect some impact from the outage we saw on June 21.” those metrics could level off after it fully overcomes that hiatus in the third quarter of the year, but its low growth rates and declining gross margins suggest its retention rates likely won’t improve significantly.
once again, fastly can’t keep up with cloudflare, which increased its dbner 400 basis points year-over-year to 127% in its first quarter.
A cloudy outlook and the departure of another CEO
For the full year, fastly expects its revenue to grow 14% to 17% as its adjusted net and operating losses grow. That’s a bleak outlook for a small-cap company in a market dominated by large-cap competitors.
To make matters worse, CEO Joshua Bixby, who took over the top job a little over two years ago, announced his forthcoming departure. Bixby’s predecessor, Artur Bergman, served as CEO of Fastly for less than a year. Bixby will remain on board until a new CEO is hired, but those shaky leadership changes could make it difficult for him to quickly tackle his biggest challenges.
it’s cheap for obvious reasons
fastly may seem like a bargain with four times this year’s sales, especially when cloudflare is still trading at 27 times this year’s sales.
However, cloudflare is still going full steam ahead, while fastly’s growth has stalled. Investors should quickly avoid and stick with the best managed companies in this challenging market for fastest growing technology stocks.