This article is a comprehensive breakdown of the fastest growing content delivery and edge network providers, Fastly and Cloudflare. My objective is to provide readers with a thorough analysis of both companies' technology, business strategy and financial metrics.
According to Grandview research, the edge computing market is expected grow at about 37% CAGR over the next five years. Hence, there is a strong investment case to be made for investors evaluating this industry. This is why I have written a full report.
Cloudflare is rated a strong buy due to their integrated product strategy, competitive advantage in cybersecurity and their advanced software defined network (SDN) architecture. Cloudflare is also growing revenue the fastest while showing signs of margin improvements. Meanwhile, Fastly is rated a moderate-buy because they still maintain the fastest content delivery network (CDN) technology and due to the huge drop in valuation relative to its growth profile. Fastly recently added a significant number of customers in their most recent quarter, but they need to show the market this customer addition can be sustainable long-term.
This article aims to provide the evidence and data that supports my ratings for both Cloudflare and Fastly. The main elements of this article cover the company product strategy, technology differences and Go-to-Market Strategy. I also compare Financial metrics, Total Addressable Market, business risks and conclusions. My article is geared towards readers who are new to the industry, I will balance the technical and business components for readers.
What are CDNs and how they are evolving:
Content delivery networks (CDN - abbreviated) are distributed networks that act as an intermediary between the origin server (such as the Cloud) and end-user's device (Like Laptop Computers). CDN's improve the speed on a webpage by reducing the distance (latency) between the end-users' web page request and the company's origin server using distributed networks that are set-up across the globe. Let's say for example, Shopify's data centre was located in Canada and they used a company like Amazon's AWS Canada as their cloud provider. If Shopify customers in Europe wanted to make an order on Shopify stores, Fastly and Cloudflare have distributed networks set-up in London with Cache capacity to help reduce the latency and bandwidth for a request made by a European customers. This thereby makes the web shopping experience faster, rather than having to make the connection request from Canada's data centres, since the request is processed nearby. Below is an illustration.
Source: Omni Sci research
The CDN industry is all about internet speed connection, networking, and efficiency for the end user. The value proposition of CDN providers such as Fastly, Cloudflare and even Akamai and Limelight is to deliver faster page loads to users by reducing latency, improve web traffic, provide a firewall and manage workload from the origin servers which saves businesses costs in bandwidth, compute, and storage.
Later in the article, I will discuss more about the industry and how CDNs are moving from an "easy and commoditized" industry into major technological powerhouses for edge computing.
Cloudflare Product Strategy:
Cloudflare is a CDN provider with a global network that provides delivery and edge network software services. Cloudflare aims to differentiate themselves on the market by providing an integrated platform - offering security, performance, and reliability through a single vendor. The goal is to be the go-to platform that provides a comprehensive suite of network and security services for the modern-day enterprise. The image below shows the major pillars of the business strategy.
Source: Cloudflare Investor Relations
As seen, the product strategy is built around Cloudflare Zero Trust Services, Network and Application Services all bundled into Cloudflare One (on the left). At the bottom is Cloudflare Edge Network and Compute services..
Briefly, I'll touch on a few of the most important product offerings that could be revenue drivers:
Fastly Product Strategy:
The mission of Fastly is to empower developers with a fast and secure programmable edge cloud platform. The company differentiates itself by providing the fastest CDN for use-cases around digital media experiences and eCommerce. Fastly is the leading CDN provider for premium brands in next-gen gaming and shopping experiences like Pinterest, Shopify, Door dash, Stripe etc. An example of Fastly's service is powering the US Elections website for the New York Times. They ensured that thousands of people globally clicking the same website get the required speed and desired security to receive vital information.
The illustration below shows the key product services that Fastly provides across content delivery, security services, and edge computing. The business model is usage-based, where clients get billed based off their amount of usage on the platform.
Source: Fastly Investor Relations
The most important products that will drive growth for Fastly include:
1) Fastly's Secure@Edge: This is their security offering - it was beefed up through the acquisition of Signal Sciences Security Services. This company offers Fastly one of the best application-level and origin server security on the market. The acquisition allows Fastly to provide privacy, access control, API protection and other key security services. More on this later in the security section.
2) Fastly's Compute@Edge has evolved into a serverless compute platform to empower developers to create new applications from scratch through Fastly's APIs and run faster compute on the edge. Fastly's Compute@Edge, similar to Cloudflare worker's platform is expected to be the main driver of revenue over the next 10-years as distributed edge computing begins to grow rapidly. To further understand the differences between Fastly's and Cloudflare's Edge Compute products and their strategy - I recommend reading this piece to understand the technical differences.
Fastly and Cloudflare have similar technology architectures which is why they have always been compared side-by-side. These are the key similarities:
The companies started in business as Content delivery networks, and they have evolved now into edge network platforms providing more security services. They are still the most accessible platforms for developers due to their open-source architecture.
They are built on similar modern-day architecture around Serverless compute and Software Defined Networks (SDN) - this is a network management strategy that corporations use to improve their network performance and monitoring. This is a cloud-native solution that ensures that a network can be programmed from anywhere virtually rather than utilizing hardware's.
There are three slight differences between both companies (there many more but I'll touch on a few):
The first slight difference according to a data expert in this field. Muji says "The strategy for building their Web Assembly is probably the biggest difference in approach as Cloudflare built theirs within the browser using Chrome's V8 Isolate engines, meanwhile Fastly took it a step further by building their web assembly deeper within operating systems. They run their development platform with their adoption of Lucet." I will encourage technical readers interested in delving more into these core differences to read Fastly Edge Compute Explained - Software Stack Investing
Also, Fastly provides a PoP (Point of Presence, which is described as the clustering of multiple virtual machines together to create a single pool of cache storage with large amounts of memory across their network). This means they have a higher cache hit-ratio and more memory for clients reducing the need for user requests to go back to the origin server. Again, for reader interested in the technical differences, I encourage reading this blog by Fastly: Why having more POPs isn't always better. The PoP strategy is a unique feature of Fastly's architecture.
Secondly, Cloudflare has a more advanced SDN and Serverless platform that is cloud-native to control multiple devices virtually - SDN is another layer of virtualization that controls a network of virtual (and physical) devices, as each server is being empowered to perform networking and security functions on air (through software) rather than having a hardware product do the networking tasks. Cloudflare's SDN has been configured to allow them to easily build more product features and innovate with their network. I recommend technical readers read asymmetrical investing to delve deeper on the SDN platform approach: Convequity research.
Third, Fastly has the edge in speed, performance, and network capability. Fastly provides 130 of Terabytes per second (Tb/sec or Tbps). They have a slightly higher global capacity through their server count. Meanwhile, Cloudflare offers only 59 Tbps of network capacity, but they use lesser servers and more virtual network server due to their SDN architecture.
Fastly also has the fastest speed and cold-start time with 35 microseconds. Cold-starts refer to the speed required for a developer to quickly run and execute code from an idle or warm state when building applications. Fastly's speed of running Lucet within a browser for executing cold starts is faster versus a Cloudflare's V8 Isolate engine approach which is not as fast. Coldstart images can be seen below:
In summary, Fastly is a much faster CDN, and edge provider based on speed requirements for developers. There are more similarities between both companies, but the core difference exists between their core fundamental technologies - from Web assembly (Cloudflare's V8 Engine vs Fastly's Lucet), the SDN and Serverless architecture. The speed of cold-start runtimes on a machine. For readers interested in understanding the technical differences, one of the best analysis can be found here Edge network analysis and Fastly Edge Compute Explained - Software Stack Investing.
The next technology difference is the cybersecurity approach of both companies. Cybersecurity appears to be a foundational element to understanding the valuation gap between both companies. The diagram below breaks down the security approach.
Source: Cloudflare & Fastly Investor Relations
Cloudflare focuses more on cloud network traffic and enterprise-wide security. Meanwhile, Fastly is more focused on the granular application layer and API security.
Historically, Fastly only had a Distributed Denial of Service (DDoS) protection solution but acquired Signal Sciences to beef up their security portfolio, within web application, edge server security, API protection solutions, and more areas listed above in the image. Signal Sciences provides a next-gen Web Application Firewall to mitigate against compromising websites and users' data. Market observers have noted that Signal Sciences offers an advanced WAF security, and is one of the leading platforms on the market as ranked by Gartner's research on Top Signal Sciences Next-gen WAF Competitors and Alternatives - Gartner 2021.
Meanwhile, Cloudflare built "Cloudflare for Teams" in-house for a wide variety of cybersecurity purposes - DDoS, bot management, identity access etc. They have massively expanded their security services from application and network security into larger security areas such as SASE networks (Secure Access Service Edge) and plan to become a fully fledged Zero-trust security company. SASE, is one of the hottest areas of cybersecurity and it has greatly expanded their TAM. SASE is a new area that merges cloud networking and cybersecurity services together. to further understand this area, readers can read this blog from Gartner. Cloudflare venturing into SASE security services (and zero-trust security) is one of the reasons why Cloudflare is compared to Z-Scaler, a major player in SASE security and zero-trust authentication product for protecting cloud networks.
Evolution from an easy CDN Industry into Edge Computing:
One of the risks pointed out by bears of this sector is that CDN providers are commoditized. They will be easily displaced. However, investors need to realize that the true growth potential for these companies is the move into edge compute networking.
As discussed earlier, the origin of edge computing lies in content delivery networks which serve web and video content from edge servers that were deployed closer to users.
The next evolution of CDN is moving towards the Edge as the amount of data generated outside of the private and public cloud data centre is a tailwind. Gartner estimates that over 70% of data in the next five years will be captured outside the cloud. Edge networks are built on CDNs, but edge networking are decentralized network of servers that allow computation and data storage closer to the point of request. Rather than hundreds of teams performing massive analysis on one cloud server, the tasks can be decomposed into steps by using distributed networks.
Source: Real-Life Use Cases for Edge Computing - IEEE Innovation at Work
Due to the sandbox provided by these nascent companies (Cloudflare and Fastly), developers and programmers can now use APIs to deploy applications on these edge servers with less runtime and less overhead as computing shifts from the large cloud data centers/cloud platforms like AWS into smaller, more distributed edge networks.
CDN providers are not only focused on publishing content to the user from cache servers, but due to the infrastructure they've built originally, they can now enable more edge compute capabilities. Many of the capabilities will be possible through the advancement of 5G networks.
Some of the key benefits of the Edge include: The ability to capture and detect problems rapidly on the internet around the globe. The rise of smarter IoT devices that will provide asset management and digitally smart factories in manufacturing, fleet tracking etc. I wrote an extensive analysis on how Palantir already uses IoT within smart manufacturing. They will further provide the computational required as demand for autonomous and self-driving vehicles grow.
They will support key industries in VR/AR, high-tech advanced online gaming, digital streaming and many more. These new high-tech technologies require advanced internet speed and computational power that cannot fully function on our current 4G/LTE internet speed.
Let's look at an example of Google's Waymo autonomous vehicles - all the computational power to run a network of cars cannot be done on only cloud server, as it will strain the cloud provider and require significant costs due to the demand globally from multiple drivers. Hence, for Waymo to be fully functional globally, distributed edge networks that can take on the load, speed and compute by breaking it apart.
Since, the network traffic and data are being directed to a source nearby, businesses can now make decisions on edge networks based on where that traffic goes and how to best control the information load and balancing. IT departments can now use these platforms to handle sudden highs and lows in traffic demand requests, constant content refreshes etc. To allow for high-quality resolution or content within these industries, you need to have low latency and networks closer to the users on the edge. These are the industries and ways that these nascent edge providers will provide the most value for businesses.
Source: Cloudflare & Fastly Investor Relations
We assess their Go-To-Market strategies by analyzing target audience for marketing products, pricing and how both companies are executing on the market. Cloudflare targets a wider audience and offers a freemium model (a business model in which a company offers basic features to users at no cost and charges a premium for supplemental or advanced features). Meanwhile, Fastly targets more medium-sized and large-scale premium customers with massive IT departments. Readers can see a breakdown of pricing and GTM company size approaches below based on reviews:
Source: Cloudflare vs. Fastly | G2 | Investi Analyst
Cloudflare Customer Growth:
Cloudflare GTM strategy is built to attract large number of users. Overtime, creating a sales funnel from the large mass of customers. The company has historically focused on targeting small and medium sized businesses, although since 2021, there have been signs that Cloudflare is upscaling and gradually attracting more enterprise level customers.
Developers have access to a good portion of their services free of charge and this is a reason why Cloudflare is popular amongst developers. The strategy is built to acquire, expand, and extend amongst the masses.
The customer GTM strategy has been successful in converting free users into paid subscribers as can be seen below:
Cloudflare Customer Growth Evaluation
Source: Cloudflare Investor Relations
Today, Cloudflare has a total of 4-million customers/developers using their software across the world, representing 46% year-over-year growth. They added - 600,000+ free paying members in Q1 2021. Out of that, an additional 119,000 new paying members was added at Q1 representing 34% YoY growth.
On the large customer front, Cloudflare recorded 117 large clients (those that spent more than $100,000/year), representing a 70% year-over-year growth. They ended the quarter with more than 945 large customers today. This includes major Fortune 500 companies signing long-term, million-dollar contracts. This is the fastest growing segment. In 2021, the company will be investing significantly into its Sales & Marketing to sell the Integrated Cloudflare One multi-product to larger clients based off indicators at the last earnings call, which suggests they will be targeting all aspects of the market.
Fastly Customer Growth:
Fastly targets large and medium-sized businesses on the upper scale of the market with bigger budgets. The goal is for large IT departments to use the platform very frequently and increase their spending on the platform. Fastly's average enterprise customer spend is around $800,000 - a significant amount, so it would make sense for their marketing efforts to be much more niche.
However, with the acquisition of Signal sciences, there are opportunities for cross-selling into SS's client base. In Q1 2021, the company recorded their highest customer increase excluding signal sciences - both in the general customer count and the enterprise clients (where spending is over 100,000/year). Fastly's general customer growth is only growing 20% YoY which is slower than Cloudflare's above. The Fastly customer breakdown can be seen below:
Source: Fastly Investor Relations | Authors Edit
In the illustration below, I've broken down the enterprise growth (customers paying over 100,000/year). Also note that Fastly's clients pay slightly more. Overall, while both companies are growing rapidly, Fastly's enterprise customer year-over-year growth rate has slowed in recent quarters (an issue for Wall Street). Meanwhile, Cloudflare has continued to grow in the upper echelon of the market supporting some points I will discuss later.
Source: Cloudflare & Fastly Investor Relations| Authors Edit
Net Dollar Retention
Let's examine how well the customers added have stayed on the platform.
Source: Cloudflare & Fastly Investor Relations
It is important to define DBNER. Dollar-Based Net Expansion Rate (DBNER) is calculated by dividing the revenue for a given period from customers who remained customers as of the last day of the given period (the "current" period) by the revenue from the same customers for the same period measured one year prior (the "base" period). Essentially, how many customers from last year who stayed back are paying more for services today.
Fastly's customers tend to consume more services from its platform based on their usage-based business model. Also, in view of their consumption business model, they have a much higher Dollar-Based Net retention rate of 139% as at Q1 2021. Since the last three quarters, those numbers have declined from a high of 147% in Q3 2020 to 141% in Q4 2020 and now 139% (another issue for Wall Street). Also, their net retention metrics have steadily declined from a high of 138% in Q2 2020 to 122%, 115% and recently in Q1 2021 to 107% (another issue for Wall Street).
Cloudflare has a self-service & pre-built solutions sales approach for the lower end of their target market. It is more of a SaaS-like business model. Their retention metrics has been growing upwards. Their DBNER has been high among their large paying customers - accelerating from 117% to a high of 123%. Cloudflare is showing signals of increasing customer stickiness. Beyond the DBNER retention metric, 88% of Cloudflare's contracted customers now use four or more of Cloudflare products, up significantly from over two-years ago.
One reason for the growth is the company's enterprise-wide security approach, where they are offering customers more products. Also, they are more subscription-based than Fastly's usage-based services, they perform best when they sell the broad platform to users.
Revenue Growth Comparison
Source: Cloudflare & Fastly Investor Relations
Cloudflare is growing faster on a year-over-year basis and quarter-over-quarter basis, they have consistently grown revenue at 50% on a 5-year CAGR and have a higher revenue in dollar amount. However, Fastly, has grown about 36-40% CAGR. It is interesting to note that in 2017, the difference between both company's revenue was about $30M (or 25%), but now there is a bigger difference of $165M (or 35%).
International Revenue: 67% of FSLY's revenue is generated from the U.S, about 11% from Europe and the rest in other countries. Meanwhile, Cloudflare generates only around 52% of revenue from the US, 26% in EMEA, and 16% in APAC. Cloudflare has more traction internationally as 40% of revenue comes from regions outside the US. On Fastly's revenue, the company is currently trying to merge their existing usage-based revenue model to signal sciences subscription-based model to allow for successful upselling to customers.
Overall, Cloudflare is growing faster and is more diversified internationally than Fastly due to wider product offerings.
Source: Cloudflare & Fastly Investor Relations | Investi Analyst Edit
Cloudflare has the highest gross margin in the industry by a mile. There are several reasons:
Cloudflare's dashboard has an array of prebuilt solutions for individuals or businesses to simply click and go, making it flexible for developers to easily access their services. These self-service solutions include lots of training manuals where any smart developer can get set-up within a few clicks. Secondly, Cloudflare spends less relative to Fastly on co-location facilities, networking, and bandwidth costs for operating their infrastructure. The nature and scale of Cloudflare's software defined network architecture discussed earlier has increased their virtual capacity in such a way that they do not need additional hardware servers to sustain their presence globally for clients. Less hardware reduces depreciation and maintenance costs.
Fastly has a greater network presence and infrastructure for speed capacity. Their lower gross margins have to do with managing more infrastructure for improving the resilience and bandwidth of their service. They pay a higher cost of revenue around fees paid for bandwidth, peering, co-location and arrangements with internet network service providers than that of Cloudflare.
Free Cash Flow Margins:
Let's evaluate the Cash flow margins. While Fastly did not provide a visual FCF in their recent Q1 results, their recent FCF margins was still negative. However, due to debt issued from financing last year, they have over a $1Billion in cash, but they are still negatively bearing anything from operations.
Meanwhile, Cloudflare has improved margins to (-5%) non-GAAP EBIT margins (up from -16% last year) and improved to (-2%) FCF margins (up from -34% last year). Cloudflare also has over $1.2B in cash with more generated from operations.
The bottom-line is that with better gross and operating margins, Cloudflare is showing more operating leverage and scale than Fastly.
Source: Cloudflare & Fastly Investor Relations
The valuations below for Cloudflare is at $69-$72 and Fastly, $39-$43 are representative at the time of writing this publication. Those EV/Sales might slightly change due to market prices. The bottom-line is that Cloudflare is valued higher at almost 3x Fastly's market capitalization and enterprise value.
Source: Investi Analyst Edit | Koyfin Analyst Estimates
As you evaluate most of the metrics and qualitative factors outlined above, it becomes easy to see why the marketplaces such a premium valuation on Cloudflare - due to the rapid growth profile, higher margins, and the scalability of their technology architecture.
Source: Investi Analyst Edit | Koyfin Analyst Estimates
I compared the company's valuation with its peers. Cloudflare's valuation is similar to ZScaler (and Okta which isn't included). This is primarily due to Cloudflare's cybersecurity approach discussed earlier. The other CDN and networking providers are valued lower. Fastly is undervalued based on their lower future anticipated growth rate, lower margins, higher losses and due to decelerating customer growth.
Source: Seeking Alpha Valuation
The TAM Opportunity:
The Total Addressable Market opportunity is another metric that is influencing market valuation and financials. Cloudflare's TAM during the IPO in 2019 was $32B but over the last two years, they have doubled their TAM to $72B. This is 2x larger than Fastly's TAM.
Fastly have grown their TAM at a much slower rate and currently sits at $36B. A major element of the wide TAM gap goes back to our earlier conversation about Cloudflare's comprehensive suite of cybersecurity solutions (Zero-trust and SASE networks) for the modern-day virtual enterprise that relies on remote working. Cloudflare has more selling opportunities than Fastly.
Source: Cloudflare & Fastly Investor Relations
Culture & Product Innovation Speed
This is the soft stuff as many would say. However, if a company does not have a strong culture, it will be hard to bring its technology IP successfully to the market. The culture for both companies is built on a premise of creating an open-source and decentralized internet that is built for developers by developers.
Source: Cloudflare & Fastly Investor Relations
The contrast between Cloudflare and Fastly begins to show in product innovation speed. First, on Cloudflare's investor days, the CEO always makes it clear to investors and analysts that a culture of innovation is at the heart of the company. Cloudflare values being able to experiment with different product releases because of its proprietary and unique technology network architecture. This has led to almost 500+ products released, far exceeding the cadence of Fastly. Matthew Prince said in his Tweet, Cloudflare's strategy is to "release products fast" and "improve them rapidly based on feedback, usage, and data".
Due to Cloudflare's GTM strategy, they can test new products with large sets of customers due to the large number of free customers on their platform (4milliion+ developers) and quickly get feedback to either trash or iterate upon a product. This is a high amount of Data moat benefiting the company. In summary, Cloudflare builds faster, learns quickly, reiterate, and improves upon it. This is another reason for the rapid expansion in TAM within two years.
Fastly, on the other hand is a good company. Based off evidence from their blog, social media, and releases, they do not have as much of a product release cadence as Cloudflare. One of the bright spots is that Fastly has an edge when it comes to having a platform that is truly developer friendly and Open source. However, the market is still waiting for Fastly's fully comprehensive Compute@edge platform to arrive for all their customers. There have also been management changes after the CFO left. They are currently searching for a new CRO and CFO, showing signs of some instability. However, these changes could turn out great for the company long-term.
The bottom-line is that Cloudflare has a higher product innovation cadence and speed to market than Fastly's. This is leading one of them to grow faster.
1) What about the Cloud Providers?
Source: Content Delivery Network (CDN) | Low Latency, High Transfer Speeds, Video Streaming | Amazon CloudFront
I'm a writer who seeks to be balanced, so I appreciate taking the time to discuss the risks for readers. The biggest issue for CDN & edge network providers like Fastly and Cloudflare is that the main cloud providers such as Amazon's AWS or Microsoft Azure can easily eliminate them from the chain by building their own networks since they own the cloud. Yes, Amazon has Cloudfront/Outpost and Microsoft has Azure Edge zones. It is also true that if a company needs to run advanced computation queries for large artificial intelligence tasks, you cannot use these nascent players like Fastly or Cloudflare alone. In such cases, you need the direct cloud providers.
While there is a possibility that this could happen, the fact is that the main cloud providers are not fully focused on this area of the cloud so far as evidence suggests. Edge providers like Fastly and Cloudflare have a unique programmable network built across the globe that isn't easily replicable for the large cloud providers.
Another evidence of the unique technology from these nascent players is when Amazon adopted Fastly's network here: CDN Fastly Wins Content Delivery Business For Amazon.com and IMDB Websites - Dan Rayburn - StreamingMediaBlog.com.
Other advantages that Fastly and Cloudflare have over the Cloud providers:
a) Developer Friendly: Cloudflare and Fastly's platforms are very conversant with developer communities. It is quite easy for developers to quickly set-up, operationalize and deploy applications across distributed edge networks. As long as the work does not involve massive computational power, any developer would want to use the computing resources of a distributed edge network over a centralized public cloud directly. For lower compute task requirements, developers can easily test their applications, run training of ML/AI models on the edge, developers can test their web apps and get faster cold starts and speed on the edge rather than waiting for the cloud.
b) Cost-sensitivity: Both platforms offer a cheaper product alternative to utilizing the core cloud. As discussed about Cloudflare's freemium model and Fastly offering a couple of free trials and both charge based on the usage of the platform. Many businesses looking for a cheaper alternative to the big cloud providers for smaller AI/ML tasks will use these nascent platforms. Similartech tracks the cost sensitivity, and this is an example: Amazon CloudFront VS Fastly - Content Delivery Network Technologies Market Share Comparison
The bottom-line is that Edge networks will continue to enhance and complement the cloud providers rather than be a pure competitor. Companies will desire to use a balance of both platforms.
2. SaaS companies building on the Edge:
The biggest pressure will likely come from well capitalized software firms targeting a niche within the edge space. For example, Palantir recently launched its Apollo for Edge AI or Agora building their own edge solutions. This may reduce the need to hire Cloudflare or Fastly. However, as mentioned, due to the breadth and depth of these nascent players CDN foundations and the extensive reach of edge networks across the globe, it will be hard for any of these players to fully disrupt them.
3. Hackers or cybersecurity attacks could prove fatal for these platforms just because they control and manage the network security for thousands of enterprises. However, both companies have an extensive security stack to prevent any attack on their network. It's something to observe in the future.
4. Akamai and Limelight are legacy giants
It is important to acknowledge that Akamai is the so called "gorilla in the room." - the leader of the space regarding infrastructure and revenue. Legacy CDN providers like Akamai (and Limelight networks, Cisco's networking, and Verizon's Edge-cast) have more data centres (2x more) and servers around the globe.
Akamai and Limelight built their CDN's in the 90's on legacy technology infrastructure that lacks scale and isn't easily architected for today's virtual internet. The nascent players like Fastly and Cloudflare CDNs were built on a foundation of open-source, virtual, serverless architecture - in such a way that you can run logic on their platforms and build upon edge networks. Secondly, However, as the years evolved, Fastly and Cloudflare built their platforms to be open-source and developer friendly to allow for easy access to build applications with their platform.
However, Akamai recently launched their global compute edge platform with security features. The legacy are trying to catch-up.
These legacy players will be successful, however, investors looking for a growth-oriented investment approach will likely benefit more from the nascent players because the legacy players cannot grow revenues as fast as these players can do. If you have more of a conservative approach, Akamai and Limelight serve that purpose since they will continue to be stalwarts. Below is an industry ranking by Gartner:
Source: 2021 Gartner Peer Insights "Voice of the Customer": Web Application Firewalls
As I conclude this report, I wanted to see how major institutional mutual funds and hedge funds were placing their bets. It appears that for all the reasons discussed above; major institutions are betting on Cloudflare with over 826 funds in the stock compared to only 361 funds within Fastly. Almost 450+ funds difference.
In a rarity for Ark Invest and Cathie Wood, they sold out of most of their Fastly stake and even bought more Cloudflare shares, an example of what is happening across Wall Street. ARKW - Next Generation Internet ETF by ARK Invest .
Source: IBD MarketSmith/Refinitiv Data
It is clear to see the winner from this analysis. Available data supports Cloudflare over Fastly. My analysis shows that Fastly should be compared to Akamai based on business strategy, while Cloudflare should be compared to Z-Scaler.
In general, both Cloudflare and Fastly will be successful long-term. The biggest risk for both companies are the major Cloud providers or niche players building their edge networks like Palantir, but as I've discussed, these nascent players are complementary to these cloud providers as evidenced by Gartner. They should continue to do well as the need for distributed edge networks grow as secular tailwinds breakout in high-computational industries like AR/VR, Gaming, Cybersecurity, Autonomous driving, digital experiences and more.
Cloudflare is rated a strong-buy. They are becoming the premier platform for Cybersecurity, web performance, network reliability and a host of multiple offerings. The launch of their integrated product suite and marketing into larger enterprise will continue to be a major strength. Their expansion into large TAM' areas of cybersecurity as well as upscaling products that meet various verticals in cybersecurity provides future runway for growth.
Cloudflare has a more advanced software defined architecture that allows for maximum virtualization and flexibility to organically build products. With higher revenue growth rate, higher gross, higher operating margins, generating more free cash flow from operations and rapid product innovation from a culture-perspective, it is clear to see why the market gives it a premium valuation. However, the company faces intense competition (from Okta, Z-Scaler) as they venture into new areas of Cybersecurity and they need to keep justifying their valuation.
Fastly is rated a moderate buy - because the story is not over and the steep drop in valuation. Fastly is still the go-to-platform for the world's digital media brands like Stripe, Pinterest, Shopify etc. They are currently the fastest CDN provider both on the Edge and amongst Cloud providers. The company arguably has the best technology based on their CDN web assembly and Lucet architecture. They also hold an advanced, next-generation WAF security product with Signal Sciences for application-level and server security. I'll caution investors that the company faces more risks. Customer Retention metrics are dropping fast, and the product stickiness is decelerating. The pace of major new clients added in the recent quarter needs to sustained.
They also have a much slower product innovation. They need to fix the management team issues and recruit a solid CRO & CFO. Fastly has more work to do to convince Wall Street.
I retain a moderate buy because of its valuation drop relative to its technology capabilities and growth profile. Also, Fastly should continue to benefit from tailwinds as edge compute grows over 30% over the next couple of years. As the CEO said: "2021 is a year where we will be getting the marquee examples and cases out there, and 2022 is when this will have a meaningful impact on revenue. And nothing's changed from my perspective."
Investors may decide if they want to continue to stick to Cloudflare as the winner. Some investors may want to take a bet on Fastly's CEO's words and bet that the company could transform its growth profile again. We will see, as a research analyst, I will be observing and analyzing both companies to see how the story turns out. My goal was to provide all the data and let investors make their decision. There is still so much to write about both companies that I missed out, so I will take any questions in the comments. Thank you so much for your patience in reading through this analysis.
This article was written by
Disclosure: I am/we are long NET. 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.
Additional disclosure: But may initiate a Long position in FSLY over the next 72-hours.