Why We're NOT Buying Fastly (Even at 22% Growth)

Okay, everybody, part three of three on this little CDN market breakdown of Cloudflare, Akamai, and Fastly. Here's where we left off with the little custom supply chain I had flagged. Fastly here is one that we'll take a bit closer look at, and I'll show you how this will ultimately work out into putting together a little mini basket of stocks in the portfolio. This one would be a CDN cybersecurity basket. We looked at Fastly financials at a very, very brief high-level look here. The revenue has re-accelerated. It's mid-twenty percent range now in the most recent quarter, and they're making progress on free cash flow and operating margins. So let's just go back here to the compare companies section, and right from within here, we can just jump into our investment thesis checklist. You can also do it down here under company analysis. I already started doing this, so let me walk you through this. This is where you can start putting in some notes. Based off of our previous work here, we can start checking off this qualitative section. Where are they in the hierarchy of the supply chain? Do they have some sort of control over their distribution of the software, really deep integration of services? I would say that's probably pretty questionable. I'd maybe even be tempted to put a red X here. Also the depth of their supply chain control over their development of their tech. Yeah, it seems like they have pretty good control over that. I didn't notice anything in our notes like they're overly dependent on someone, for their technology. Breadth of the tech and ability to scale the platform, that's what we're gonna look at here in just a moment. To what extent can they kind of replicate what Cloudflare did with building out cybersecurity and developer tools as part of the core CDN service? Is it sticky? It appears not. Shopify used to be a major customer, and they pretty easily just switched to Cloudflare. Complexity. I'm just gonna stick a yellow flag here. Maybe with a bias towards putting a green check here. It is hardware plus software, but they are reliant on those data center co-location services. So, you know, kind of a mixed bag qualitatively, at least in our assessment here, and you can put some additional notes beneath that, if we open up the annual report and take some additional notes from the company. Revenue model, subscription versus consumption, or is it license or service? It's a mix of a lot of different things because it's a platform, it's a CDN, it's cybersecurity, observability, some AI products. And that overall shows up in the gross profit margin and negative operating margin on a GAAP basis, at least. That has improved a bit, but it is still lagging behind Cloudflare. So we'll flag that. Expense control, they've definitely made a lot of progress on this. Stock-based compensation to revenue, it's still high though at nearly 19%, but it was 34% a few years ago, so there is some improvement here. This really honestly just deserves a lot of flags if you're looking at investing in something like this for the long term. So this particular one on the capitalization is growth funded without heavy dilution. Diluted weighted average share count over the last one year over six percent. We had set a target of no more than two percent, so it doesn't meet that. Sales cycle. This is going fairly well, I would say. It would seem that they're at least holding onto and growing some of their customer relationships. Let's be generous here and just put a green check mark. And then also marketing efficiency. This is going to be closely related with capitalization in the case of this, you know, the life cycle of this particular software company. So there's some quantitative checks on the business, and let's get to a reverse DCF then on Fastly. They do not generate GAAP earnings per share. That's negative. So we need to use free cash flow per share. It was at thirty-three cents in the last reported 12 months, so I've weighted this 100% to free cash flow. The sales cycle is fairly long for software, even for an infrastructure-based software play like this one. So I extended this out to 10 years, set the terminal rate at 5% for starters. What growth rate, average growth rate per year, which CAGR is needed for free cash flow per share over the next decade? It's at 22%. That's what justifies the current stock price of let's just say roughly $26. 22, maybe 23% CAGR. I'm gonna save the scenario. I'm not gonna hit notifications on this particular target, but what we could do is if we wanted to be notified if the stock price hit what we felt was a good margin of safety, let's lower this growth rate down to under 20%. If the stock price currently over 26 bucks per share were to drop 30% to under 19, that might be interesting. I'll enable notifications on that. I'll save that scenario, and I'll get notified if Fastly were to fall. Finally, it's just making this a watchlist. Because we already have Cloudflare, this is probably more like a pass for us overall. But, if the stock price did fall significantly, I'll put it on watch. Certainly not something we would consider a buy. And down here at the bottom, you can generate a report, but let me just save this progress here and go back to the custom supply chain. So how would we use something like this? Within this supply chain that we made, CDN companies, internet infrastructure, these are the pure plays. If you believe internet infrastructure needs a major upgrade to get ready for the AI era, we think it does. There's a lot of different ways to play it. The CDN providers are one way to do it. Of course, semiconductor companies, especially CPU providers, even some GPUs like Cloudflare has been building NVIDIA GPUs into its edge network, its points of presence at the network edge for a few years now. The other companies are going to be doing so as well. These companies could most certainly participate, but so are the vertically integrated data center hyperscaler companies as well. So at this point, this is why we've ultimately stuck with just Cloudflare, the leader in next gen CDNs, and left the bulk of the portfolio in internet and data center infrastructure here with the hyperscalers. So how could you use something like this? If we were starting from scratch and we wanted some CDN exposure, we could do Cloudflare, probably with a bias in this basket towards having mostly Cloudflare and then maybe smaller positions in Akamai and Fastly. Akamai, if it's able to turn itself around financially, and Fastly if it can continue to build some momentum and invest in increasing its platform's capabilities. Now one last thing we can do here to monitor for progress for Fastly, I'll take you back to the research dashboard one more time. Back under company analysis, individual company analysis under Fastly, hopefully this saves you a step here. There is a link directly to the investor relations page. So I'll click on that, open up Fastly, and here you have all the financial results for the company, and you can monitor for progress here, see if they're launching any new products, making any new acquisitions as they are able to increase their net cash balance. We can also filter news releases as well and keep track of that and see if they have any acquisitions that are being made. Stay tuned on that. We'll have some new features launching around being able to track company news and especially company press releases. That's a look at the CDN market. Really helpful to kind of go through this for ourselves and take a look at Cloudflare has been a fantastic position the last six, seven years for us. So good to do a review, see if there's any rebalancing that needs to be done, and maybe there is. But no need for us to go in and trim that position to rebalance that portion of the portfolio, of that basket for internet infrastructure. We think we are in good position there, but if it's something that you need, maybe this helps you figure out how to put Cloudflare, Akamai, and Fastly on your watchlist and figure out how you might start building a portion of your portfolio allocated to that part of the global IT infrastructure.