Fastly Earnings: Growth Trends Look Good, and Hiccup in Margin Improvement Should Resolve

No-moat Fastly FSLY continued to see momentum in its business in the third quarter, with the solid execution extending this year’s trend. Margins have improved dramatically but backtracked a bit this quarter. Usage costs that caused the hiccup should prove temporary, and we expect margin expansion to be back on track by 2024. The after-hours pop in the stock seems excessive, as results were at the top end of guidance and management essentially maintained full-year guidance while raising the midpoints. Nonetheless, the move does bring Fastly closer to where we believe it’s fairly valued after the recent selloff. We’re maintaining our $20 fair value estimate, as nothing in the quarter changes our outlook.

Sales were up 18% year over year to about $128 million and continue to show positive underlying trends. Fastly added another 30 customers in the quarter, and more importantly, it is seeing existing customers take more products and spend more. Spending from enterprise customers—classified as customers that spend over $25,000 per quarter, which make up over 90% of Fastly’s revenue—increased 5% sequentially. Also, the firm’s remaining performance obligations, which represent future revenue commitments by customers, grew another 7% sequentially (43% year over year) and now stand at $248 million. As Fastly continues to become stickier with customers and offer more services, including compute and security, we expect it to maintain its double-digit annual growth rate.

Gross margin was up about 3 percentage points year over year but down 60 basis points sequentially. Adjusted EBITDA was positive for the second straight quarter—albeit marginally—after being negative throughout 2022. We expect Fastly to continue getting operating leverage on its revenue growth and to receive better terms for its traffic costs, leading us to believe there is a long runway for material operating margin expansion each year.