re: stock tip...FSLY

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I can’t tell what volume of traffic this equates to for Fastly, but even though all the images are very small in size, it’s the home page of Amazon.com and IMDb, so it is substantial. Amazon.com is usually ranked in the top 15-20 largest websites, in terms of traffic by Alexa, and IMDb usually hovers around number 60.

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In terms of setting a price target, FSLY is currently trading at about $38. This is up 65% from the pre-earnings price of $23.05. While there was a substantial run-up after earnings, the stock has been range bound for the past year. FSLY is targeting $285M in revenue for 2020. I think they can deliver $300M and approach break-even on EPS, based on the substantial raise of $25M in revenue in the Q1 report. This would represent 50% annualized growth. Today’s EV/Rev ratio is about 16. With $300M in revenue, the end of year EV target would be $4.8B. Current EV is about $3.5B. This would imply growth of 37% or a share price of about $52 by end of 2020.

Pushing out four years to end of 2024, I think FSLY can maintain high annualized revenue growth of 40% in 2021, dropping to 38%, 35% and 32% in subsequent years. This high revenue can be justified by the large addressable market, the addition of Compute@Edge and Fastly’s relatively small annual revenue amounts currently (law of small numbers). This would put 2024 revenue at approximately $1.0B. I think we can assume positive operating margins and FCF margin at this point. For 30+% growth and positive operating margin, a reasonable EV/Rev ratio range is 12-16. At the midpoint, this puts EV at $14.5B in 2024, or 4.1x today’s value. Therefore, I think a 5 year price target of $155 is reasonable.

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