Meta Platforms (NASDAQ:META) has enjoyed considerable attention as the face of the metaverse movement. Despite incurring substantial losses in this venture, the tech magnate remains resolute about its potential, asserting during Meta’s Q2 earnings call, “This is the direction that the world is going in.”
META, after a challenging 2022, is demonstrating remarkable performance in 2023, with its stock surging 138% year-to-date, eclipsing the broader equities market.
While Meta’s stock gains have dominated headlines, there exists another metaverse player quietly excelling – a company whose shares have outperformed both META and the Nasdaq Composite ($NASX) this year.
Unveiling Fastly
Established in 2011 by Artur Bergman, Fastly (NYSE:FSLY) is a cloud computing firm specializing in edge cloud platform solutions. Edge cloud computing enables businesses to provide websites and applications with low latency, security, and reliability to users.
As artificial intelligence (AI) and the Internet of Things (IoT) gain widespread adoption, the significance of edge cloud computing is anticipated to rise. Projections indicate that the edge cloud computing market could reach $274 billion by 2025.
Fastly maintains a leadership role in this domain, boasting notable clients like Paramount Global (NASDAQ:PARA), DoorDash (NYSE:DASH), and Gannett (NYSE:GCI). Despite a modest market capitalization of $2.83 billion, Fastly’s shares have surged by an impressive 177.5% YTD, surpassing both META and Nasdaq’s 30% growth by a significant margin.
What Drives FSLY’s Rally?
Strong Performance
Recently, Fastly’s stock gained momentum following the release of its Q2 results. The company not only reported revenue growth and reduced losses but also exceeded market expectations. Q2 revenues stood at $122.8 million, a 20% YoY increase, surpassing the consensus forecast of $118.7 million. Losses narrowed to $0.04 per share from the previous $0.23, surpassing the average analyst projection of a $0.10 loss per share.
Fastly additionally reported a positive adjusted EBITDA ($5.2 million compared to the prior year’s -$16 million), along with improvements in dollar-based net expansion rate (123% in Q2 2023 versus 120% in Q2 2022), net cash generation from operations ($24.9 million versus -$16.7 million), and average enterprise customer spending (11% annual growth). The company also demonstrated a reduction in long-term debt. These favorable outcomes led to a 23% single-session surge in Fastly’s share price post-earnings.
Strategic Moves in the Metaverse
Fastly has made its presence felt in the metaverse arena through strategic moves. It joined the Microsoft Cloud for Metaverse Partner Program earlier in the year, gaining access to Microsoft’s expertise and resources in developing metaverse applications on Microsoft Azure. Furthermore, Fastly became part of the Metaverse Research Hub, a collaborative effort between META and other entities to accelerate metaverse development, thereby gaining access to Meta’s research in this realm.
Additionally, Fastly’s collaboration with Unity Software (NYSE:U), a game engine platform developer, aims to offer edge computing services to Unity developers creating metaverse applications.
Challenges Remain
Despite noteworthy earnings progress, challenges persist for Fastly. The company continues to operate at a loss, albeit with narrowing losses over the past three quarters. Notably, its customer count remained nearly stagnant from the prior year, and a slight sequential decline in the customer base raises concerns, especially in the rapidly growing cloud computing market.
While the second quarter saw an improvement in free cash flow ($7.8 billion), this trend might reverse due to anticipated higher working capital requirements and reduced operating margins.
Valuation and Analyst Outlook
Comparing Fastly to companies like Microsoft (NASDAQ:MSFT) and Amazon (NASDAQ:AMZN), which have diversified revenue streams, reveals Fastly’s attractive valuations at current levels. With an enterprise value/sales ratio of 6.26, Fastly’s valuation is considerably lower than Cloudflare’s (NET) EV/Sales ratio of 16.07. The price/book ratio further underscores this difference, with Fastly trading at a P/B of 2.66 compared to Cloudflare’s 31.19.
Analysts project solid earnings growth for Fastly, estimating a 15.91% growth for the current quarter and 25% for FY 2023. The consensus rating stands at “Hold,” with an average target price of $18.17, approximately 20% lower than the current levels. Among 12 analysts covering the stock, 4 recommend a “Strong Buy,” 6 advise a “Hold,” and 2 suggest a “Strong Sell.”
Conclusion
Fastly has secured a respectable position within the expanding cloud computing sector. Its recent improved performance and strategic ventures demonstrate its alignment with the metaverse’s evolving landscape. However, challenges in profitability, customer concentration, and cash flow generation persist. Analyst caution prevails, as limited post-earnings upgrades or price-target adjustments suggest continued skepticism. While the stock showcases remarkable returns, exercising prudence in considering Fastly’s potential, given current levels, is advised due to potential limitations in the short-term upside.
Featured Image: Freepik @ hujur1100
Author Faith Yakubu 
