Offering cloud solutions to large organizations, Fastly (FSLY) is delivering massive revenue growth with a magnificent gross profit margin. Besides, the company reports better financial figures than other competitors. Fastly (FSLY) should be very successful in selling shares in its new IPO. After the IPO, at 4x forward sales, FSLY may present a good buying opportunity.

With that, the company’s dual-class structure and the fact that it will use the proceeds to pay the debt are not ideal. However, these unfavorable features should not affect the company’s total valuation that much.

Source: Prospectus

Source: Prospectus

Business

Founded in 2011, Fastly, Inc. offers an infrastructure-as-a-service cloud computing platform among other solutions.

Check below what do the New York Times and BuzzFeed say about FSLY:

Source: Company’s Website

Github and Spotify (SPOT) are also FSLY’s clients. They report how useful Fastly is for managing a large customer base and thousands of request per second. See below more information on this matter:

Source: Prospectus

The number of products and solutions offered is overwhelming. Products include content distribution networks (“CDN”), cloud security, and image optimization. Besides, FSLY also provides customized solutions for business clients in the e-commerce industry, the SaaS industry, among other sectors. The image below was taken from the company’s website:

Source: Source: Company’s Website

The company’s key business metrics are impressive. In the three months ended March 31, 2019, the company reported 1,621 customers, 12% more than that in December 2019. Also, the number of customers has increased in 2019 and 2018. The image below offers further details on this matter:

Source: Prospectus

Top Management

Among the directors of the company, the profile of the CEO and Co-Founder, 39 years-old Artur Bergman, is remarkable. As shown in the image below, he was previously director of technology at Wikia:

Source: Crunchbase

Besides, there is 45-years old Adriel Lares, the CFO, who brings investment banking expertise as well as an experience from posts in large organizations like Yume, Walt Disney (DIS), or HP (HPE). The image below offers further details on this matter:

Source: Bloomberg

Employees And Facilities

As of March 31, 2019, FSLY has a total of 489 employees with 38% being in San Francisco. The company also has offices in Portland, Denver, New York, London, and Tokyo.

Some investors will find it beneficial that FSLY does not own any property and has a remote-friendly culture. FSLY leases new facilities only when it needs additional space. This strategy should bring a lot of flexibility. Besides, it will be easy for the company to adapt better to product demand.

The lines below offer further information on the FSLY’s total amount of employees and facilities:

Source: Prospectus

Source: Prospectus

Assets

As of March 31, 2019, the company’s financial situation is stable. The asset/liability ratio approximates to 2.11x. Besides, FSLY has $21.3 million in cash and $45 million in marketable securities, which appears very beneficial. Keep in mind that IPO investors prefer giving money to those companies which already have cash in hand.

See below more on the list of assets:

Source: Prospectus

The amount of property and equipment acquired by FSLY is worth $47 million, 28% of the total amount of assets. As shown in the image below, the most significant assets among the property and equipment are computer and networking equipment.

FSLY does appear to own a considerable amount of equipment. However, the company also leases equipment from external providers. The image below is an example:

“In June 2017, the company entered into a Capital Lease Agreement with an equipment provider for $5 million in network equipment, at an annual interest rate of 5.24% over a term of 4 years. The agreement provides for a bargain purchase price at the end of the term. The amortization of leased assets is included in depreciation and amortization expense.” Source: Prospectus

The fact that the company leases equipment is very relevant. Clients and shareholders should know it. With this information in mind, they may not be interested in using the company’s services for treating sensitive information. This fact may limit the number of sales that FSLY can generate.

See the table below for further details on the company’s property and equipment:

Source: Prospectus

Liabilities

As of March 31, 2019, the total amount of liabilities approximates to $77.7 million. Right now, the financial risk is not worrying. However, market participants should get to know the terms and the amount of debt outstanding. As of March 31, 2019, the company had long-term debt of $39.4 million and warrant liabilities of $3.9 million. The image below offers further details on this matter:

Source: Prospectus

As shown in the image below, FSLY should pay $61 million in one to three years, including operating lease obligations, purchase obligations, and debt. The company has $21.3 million in cash and $45 million in marketable securities, which is enough to pay the obligations. However, the company’s CFO is negative, so FSLY requires new capital to finance its operations.

The table below provides a list of contractual obligations:

Source: Prospectus

37% Revenue Growth And FCF Growth

As of December 31, 2018, FSLY reported revenue of $144 million, 37% more than that in 2017. The gross profit is beneficial. It was equal to 53% and 54% in 2017 and 2018 respectively. The table below offers the top of the P&L:

Source: Prospectus

FSLY reports negative FCF and CFO. However, in 2018, the CFO increased by $8.9 million and the FCF increased by 6.85%. While FSLY needs additional capital to finance its operations, it is favorable that the company is reducing its cash burn rate. The image below offers further information on these matters:

Source: Prepared By The Author

Use of Proceeds

The company expects to use $47.5 million to pay the debt, which most investors may not appreciate. As mentioned, the company needs to proceed in this way to continue its operations. The lines below offer further information on the use of proceeds from the IPO:

Source: Prospectus

Competitors

The following companies compete with FSLY:

  • Akamai (AKAM)
  • Limelight (LLNW)
  • Level 3
  • Imperva (IMPV)
  • Cloudflare (FLARE)
  • InStart
  • StackPath
  • Section.io
  • Amazon (AMZN)
  • Google (GOOG)
  • Citrix (CTXS)
  • A10 Networks (ATEN)
  • Cisco (CSCO)
  • Radware (RDWR)
  • Arbor Networks

Among these peers, only ATEN, RDWR and LLNW appear to have a size similar to that of FSLY. They trade at an Enterprise Value/Forward Sales of 1.4x-3.3x with revenue growth of -1%-10.9% and gross profit margin of 47%-82%. Unlike FSLY, ATEN, RDWR and LLNW don’t report debt. The image below offers further information on this matter:

Source: Ycharts

FSLY has revenue growth of 37% y/y and gross profit margin of more than 50%. With these figures in mind, the company should trade a bit above the EV/Forward Sales ratio of ATEN, RDWR, and LLNW. If the company continues to release good revenue growth, FSLY could easily trade at 4x forward sales. The amount of debt due should not represent a serious issue. It should not affect the company’s valuation.

As of December 31, 2018, FSLY had revenue of $144 million, so forward revenue of $172 million appears to be reasonable. Using the ratio of 4x, the total enterprise value should be close to $576 million.

Shareholders, Class A And Class B Shares

Some shareholders expect to sell shares. However, the amount of equity that they are willing to sell is minimal. It is beneficial as it means that they believe in the future of FSLY. The image below offers further information on this matter:

Source: Prospectus

After the IPO, the company expects to have two types of shares, which most investors will not appreciate. As shown in the lines below, class B stockholders have the right to ten times more votes than class A stockholders.

“Holders of our Class A common stock are entitled to one vote per share of Class A common stock and holders of our Class B common stock are entitled to 10 votes per share of Class B common stock.” Source: Prospectus

As a result, the CEO expects to have 15.3% of the voting power. While the company is not controlled, he will significantly influence in case of takeover attempts or any other matters requiring shareholders’ approval. The lines below offer further details on this risk:

Source: Prospectus

Conclusion And Risks

With 37% revenue growth and gross profit margin of more than 50%, FSLY reports better figures than most competitors. The market should take into account this fact. FSLY should not sell shares at the Enterprise Value/Forward Sales ratio shown by the competitors. They trade at 1.4x-3.3x, because their revenue growth is below 11%. With this in mind, after the IPO, at 4x forward sales, FSLY may present a good buying opportunity. With that, there are several risks that should be mentioned. If the company is not able to maintain the same growth pace in the next quarters, the stock price may decline. Besides, the CEO owns 15.3% of the voting power and there are dual-class shares. As a result, minority shareholders may have issues if the management does not perform. Keep in mind that takeover attempts could not work. The CEO and the owners of class B shares may have sufficient influence to block such transactions.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

(Excerpt) Read more Here | 2019-05-15 00:25:00
Image credit: source

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