Cloudflare vs Fastly: Which Stock Has More Upside Potential?

The coronavirus pandemic has more than ever made businesses, educational institutions and other organizations dependent on using remote tools and has accelerated the shift to the cloud. The spike in internet traffic has put CDN (content delivery network) and edge computing companies like Akamai Technologies, Cloudflare, Fastly, and Limelight Networks in the forefront.

What’s more, these companies are also seeing stronger demand for their cybersecurity solutions as remote working and increased reliance on the internet has heightened the risk of malicious cyber-attacks.

Using the TipRanks’ Stock Comparison tool, we will place Cloudflare and Fastly side by side to see which stock offers a more compelling investment opportunity.

Cloudflare (NET)

Cloudflare’s global cloud platform provides a broad range of network services, including security for websites and applications from cyber attacks and CDN solutions that ensure faster delivery of internet content. Cloudfare’s revenue has grown at a compounded annual rate of 50% from 2016 through 2019 and the company currently has over 3 million customers.

The pandemic-led work-from-home trend helped Cloudflare boost its paying customer base by 24% Y/Y to 96,178 in the second quarter. Large customers (those paying more than $100,000 annually) rose 65%. During these difficult times, the company is offering concessions and is allowing deferral of payments to certain customers who need them.   

The larger customer base drove a 48% rise in Cloudflare’s second-quarter revenue to $99.7 million. Adjusted loss per share during the period narrowed to $0.03 compared to a loss per share of $0.22 a year ago. Also notable is the company’s gross margin, which contracted Y/Y but still came in at 75.8% (adjusted 76.8%) in the second quarter.

Looking ahead, Cloudfare sees revenue growth in the range of 39% to 40% in the third quarter and 41% to 42% in the full year.   

Cloudflare has a presence in over 100 countries and international business accounted for over 50% of its second-quarter revenue. It continues to invest in international growth as part of its strategy to expand its global customer base.

On August 7, Robert W. Baird analyst Jonathan Ruykhaver raised his price target on the stock to $48 from $45 following the better-than-expected second-quarter results and full-year revenue guidance. The analyst maintained a Buy rating.

“We see the company continuing to leverage an innovative platform of products addressing security, performance, and a variety of other use cases.” Ruykhaver said in a note to investors. “We like the story and see a long tailwind for growth as the company maintains its move upmarket while continuing to deliver product innovation.” (See NET stock analysis on TipRanks)

Overall, the Street has a Strong Buy analyst consensus on the stock based on 10 Buys versus 2 Holds. With shares up a stellar 104% year-to-date, the average analyst price target of $48.25 implies upside potential of another 38.8% over the next 12 months.

Fastly (FSLY)

The stock of edge computing specialist Fastly has jumped a whopping 303% so far this year. Fastly’s edge computing platform processes data and applications closer to end-users and ensures improved speed and efficiency. Amid the pandemic, the company is seeing robust adoption of its edge platform, CDN and security products by both new and existing customers.

The company’s customer count grew about 20% Y/Y to 1,951 in the second quarter. Moreover, Fastly’s enterprise customers (revenue in excess of $100,000 annually) increased by 16% to 304. Enterprise customers generated 88% of the trailing 12-month revenue as of June 30.

The company’s net retention rate increased to 137.8% compared to 110.9% in the second quarter of 2019. Overall, accelerated digital transformation needs during the current crisis fueled a 62% advance in Fastly’s second-quarter revenue to $74.7 million.

Strong top-line growth and an expansion in the adjusted gross margin to 61.7% from 55.6% in the second quarter of 2019 helped the company swing to an adjusted EPS of $0.02 from an adjusted loss per share of $0.16 during the same quarter last year.   

However, the upbeat performance was overshadowed by Fastly’s disclosure that China-based TikTok is its largest customer and contributed 12% of the company’s revenue in the first half of 2020. Investors perceive this as a major risk as President Trump has called for TikTok’s ban in the US if its owner ByteDance doesn’t sell the app to an American company by September 15.

Growth beyond the domestic market is vital for Fastly. As of the end of June, 52% of the company’s customers were from international markets. The company is increasing the number of POPs (Points-of-Presence) in select international locations to attract more customers.

Meanwhile, Fastly continues to expand the availability of Compute@Edge and invest in its enhancements. It is also expanding its security offerings through the recently announced acquisition of web application security company Signal Sciences.

Following the Signal acquisition, Credit Suisse analyst Brad Zelnick on August 28 raised the price target on the stock to $110 from $100 and maintained his Buy rating . Zelnick believes, “the deal advances Fastly’s position in edge security, specifically in the context of DevSecOps, and in a way that differentiates from prior generation technology.”

The analyst added, “In addition to TAM [Total Addressable Market] expansion and the likelihood for synergies, the deal appears both growth and GM [Gross Margin] accretive on a standalone basis.” (See FSLY stock analysis on TipRanks)

The rest of the Street is cautiously optimistic on the stock. The Moderate Buy analyst consensus is based on 7 Buys, 3 Holds and 2 Sells. The analyst average price target of $92.38 suggests additional upside potential of 14.2% in the coming 12 months.

Conclusion

Both Cloudflare and Fastly are poised to benefit as more businesses migrate to the cloud. Currently, both stocks have lofty valuations. However, Cloudflare’s higher margins and greater upside potential in the stock make it more favorable than Fastly.

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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment