Fastly's Near-Term Risks Include Challenges with Top Customers, Analyst Expresses Concern

B of A Securities analyst Tal Liani downgraded Fastly Inc FSLY from Buy to Underperform and lowered the price target from $18 to $8.

On Wednesday, Fastly reported quarterly sales of $133.52 million, up by 13.6% year-on-year, which marginally beat the analyst consensus estimate of $133.1 million. EPS loss of $(0.05) beat the analyst consensus estimate loss of $(0.06). The stock price plunged on Thursday.

Near-term risks outweigh the longer-term positive catalysts, as per Liani.

Decelerating growth in Fastly’s largest customers, share loss in delivery, and limited visibility in the second half caused the analyst to question a rebound in 2024. 

While Liani continues to like Fastly’s positioning in the edge compute market, he noted it as a 2025 opportunity instead of a near-term growth driver.

The risk factors could prompt further downward revisions to guidance, which, according to the analyst, may keep the stock in check. 

The analyst said Fastly is experiencing share loss and pricing pressure within the delivery business, as evidenced by a second-quarter revenue guide of 7.5% growth, compared to Street’s 14%.

Liani stated that management attributes the expected weakness, which is most prevalent in the top 15 customers, to lower renewal rates not being accompanied by historical traffic increases and the adoption of multi-vendor CDN strategies compared to last year’s environment of sable pricing and vendor consolidation. 

He also flagged that Fastly’s largest customers, which account for 40% of revenues, typically do not have minimum commits embedded in contracts, further increasing the risk of traffic being diverted to lower cost

providers.

Despite management reducing fiscal 2024 revenue guidance from 15% growth to 11% growth at the midpoint, Liani noted that further downward revisions could occur. 

The guide baked in no further share loss among Fastly’s top customers and continued improvement in new customer acquisition, which could prove too aggressive given current trends and Fastly’s limited visibility into large customer traffic patterns, which can be volatile in seasonally sensitive quarters, as per Liani.

He remained positive about Fastly’s positioning in the edge computing market and noted that edge computing will be a key catalyst for the stock beginning in the calendar year 2025. 

Liani also flagged Fastly’s expansion within its security portfolio, which should help drive cross-selling, especially as larger enterprise customer contracts come up for renewal.

Investors can gain exposure to Fastly stock via IShares U.S. Digital Infrastructure And Real Estate ETF IDGT and Themes Cybersecurity ETF SPAM.

Price Action: FSLY shares traded lower by 34.1% at $8.54 on the last check Thursday.