3 Reasons FSLY is Risky and 1 Stock to Buy Instead

Fastly has gotten torched over the last six months - since December 2024, its stock price has dropped 22.7% to $7.68 per share. This may have investors wondering how to approach the situation.

Is now the time to buy Fastly, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.

Why Do We Think Fastly Will Underperform?

Even with the cheaper entry price, we're sitting this one out for now. Here are three reasons why FSLY doesn't excite us and a stock we'd rather own.

1. Long-Term Revenue Growth Disappoints

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last three years, Fastly grew its sales at a 14.3% annual rate. Although this growth is acceptable on an absolute basis, it fell short of our standards for the software sector, which enjoys a number of secular tailwinds.

2. Low Gross Margin Reveals Weak Structural Profitability

For software companies like Fastly, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.

Fastly’s gross margin is substantially worse than most software businesses, signaling it has relatively high infrastructure costs compared to asset-lite businesses like ServiceNow. As you can see below, it averaged a 54% gross margin over the last year. That means Fastly paid its providers a lot of money ($46.00 for every $100 in revenue) to run its business.

3. Short Cash Runway Exposes Shareholders to Potential Dilution

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

Fastly burned through $25.35 million of cash over the last year, and its $402 million of debt exceeds the $307.3 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.

Unless the Fastly’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.

We remain cautious of Fastly until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.

Final Judgment

We cheer for all companies solving complex business issues, but in the case of Fastly, we’ll be cheering from the sidelines. After the recent drawdown, the stock trades at 1.8× forward price-to-sales (or $7.68 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. There are better stocks to buy right now. We’d suggest looking at our favorite semiconductor picks and shovels play.

Stocks We Like More Than Fastly

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