During the October 1 episode of Mad Money, Jim Cramer revisited Fastly, Inc. (NASDAQ:FSLY), discussing its improved performance and growing focus on AI-related internet activity. It is also one of the overlooked AI stocks to buy now.
A Recovery From Its Pandemic-Era Setback
Cramer began by recalling the Fastly, Inc.’s earlier difficulties:
Finally, let’s talk a little bit about Fastly. This is not a company that I’ve spent much time on recently. I remember Fastly as a fleeting pandemic era darling. The stock caught fire at one point in large part because it was the content delivery network for TikTok which was exploding in popularity at the time but then Fastly lost most of the TikTok business and the stock imploded. For years, it felt like a broken momentum stock that was losing money. They didn’t start turning a profit till last year. Lately though, the stock’s had an incredible run, up 159%, for the year thanks to some spectacular earnings numbers.
Fastly’s latest results showed second-quarter revenue increasing 23% year-over-year to approximately $183.3 million. Security revenue rose 43% to approximately $41.7 million, while Network Services grew 17%. GAAP gross margin expanded to 63.3% from 54.5%. The profitability distinction is important. It reported approximately $26.2 million in adjusted net income but remained loss-making under GAAP, with a net loss of approximately $15.6 million.
More Customers Are Using Multiple Products
Cramer then turned to Fastly, Inc.’s September investor presentation, as he said:
If that wasn’t enough to catch Wall Street’s attention, Fastly put itself on the radar again last week. First, last Tuesday, the company held an investor day where management explained how Fastly’s transitioning from a simple content delivery network, CDN, turnaround story to a much more exciting edge cloud play fueled by booming web traffic from all these AI agents. Second, this came right as everybody was realizing the power of Meta’s Muse platform, something that really lit a fire in the stock…
At its September 22 investor day, management said 72% of customers used at least two product suites, up from 58% two years earlier. The share using four or more suites increased to 30% from 7%. Management also described AI and computing services as longer-term growth opportunities along with its efforts to expand existing customer relationships. You can also read another AI-related development about the company from the investor day.
Customer Concentration and Price Remain Concerns
Fastly, Inc. remains dependent on a relatively small group of large accounts. Its ten biggest customers generated 37% of second-quarter revenue, compared with 31% a year earlier. Free cash flow also declined to approximately $3.6 million from $10.9 million, despite higher revenue and positive operating cash flow.
The shares trade at approximately 48x forward earnings, compared with approximately 16.6x for Akamai. Fastly’s faster growth provides context for the premium, but the valuation relies on adjusted earnings expectations while the company continues to report GAAP losses. Cramer’s recommendation highlighted his concern about paying too much after the rally, as he said:
So, have you missed it or can… [it] keep running?… [It is] trading at over 50 times this year’s earnings, but that’s still pretty rich, and the stock has a tendency to be insanely volatile… So again, I urge you to wait for a lower entry point.
Fewer Fund Holders Accompany a Large Short Position
Insider Monkey’s database showed 28 hedge funds holding Fastly in Q2, down from 41 in Q1. That represents a sizable decline in the number of holders. Of those hedge funds, after increasing its holding by 153%, D E Shaw was the most prominent shareholder in the quarter with 6.6 million shares. Short interest stood at 15.74% of the public float, showing considerable bearish positioning.
Fastly, Inc.’s stronger sales and broader product adoption seems to give Cramer reasons to take another look at the business. The remaining losses, customer concentration and valuation help explain his reluctance to chase the shares. For now, he would wait for a lower price rather than buy on the strength of the rally alone.
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