The Metaverse Stock Outperforming Meta Platforms

Mark Zuckerberg-owned Meta Platforms (META) has been hogging the limelight in recent times when it comes to all things metaverse. Although the tech mogul has lost tens of billions of dollars so far on this endeavor, he remains convinced of its prospects, telling analysts, “This is the direction that the world is going in,” during Meta's second-quarter earnings call. 

And after a brutal year in 2022, META is performing much better in 2023. The stock is up 138% year-to-date, absolutely crushing the broader equities market.

While there have been plenty of headlines about the breakout in Meta's stock, there's another company making moves in the metaverse that's flying under the radar - even though its shares have outperformed both the Nasdaq Composite ($NASX) and META on the charts this year.

About Fastly

Founded in 2011 by Artur Bergman, Fastly (FSLY) is a cloud computing company with a core focus on edge cloud platform solutions. Edge cloud computing allows businesses to deliver their websites and applications to users with low latency, security and reliability. 

The reach of edge cloud computing is only expected to increase in the coming years, as artificial intelligence (AI) and the Internet of Things (IoT) continue to gain traction and mass adoption on a rapid basis. According to current industry projections, the edge cloud computing market is expected to reach $274 billion by 2025.

Fastly remains a leader in this space, with some of its notable customers including Paramount Global (PARA), DoorDash (DASH), and Gannett (GCI) - though the company commands a fairly modest market cap of $2.83 billion.

Shares of Fastly have zoomed 177.5% YTD - not only surpassing META, but outperforming the Nasdaq's 30% rise by several orders of magnitude.

Strong Quarterly Results, Strategic Moves Drive FSLY's Rally

Most recently, Fastly stock caught a boost from the company's results for the second quarter ended June 30.

Not only did Fastly report revenue growth and narrowing losses, but both top- and bottom-line figures surpassed the Street's expectations. Revenues for the quarter came in at $122.8 million, up 20% YoY and above the consensus estimate of $118.7 million. Losses narrowed to $0.04 per share from $0.23 per share, besting the average analyst estimate for a loss of $0.10 per share.

Moreover, Fastly reported a positive adjusted EBITDA ($5.2 million vs. -$16 million in the prior year), along with improvement in dollar-based net expansion rate (123% in Q2 2023 vs. 120% in Q2 2022), net cash generation from operating activities ($24.9 million vs -$$16.7 million), and average enterprise customer spends (11% yearly growth), plus with a decline in long-term debt.

Consequently, shares of Fastly jumped 23% in one single session after earnings.

Key Metaverse Moves

Returning to Zuckerberg's domain, Fastly has been making its presence felt in the metaverse space with significant strategic moves.

Earlier this year, Fastly announced that it was joining the Microsoft Cloud for Metaverse Partner Program. This program is designed to help businesses build and deploy metaverse applications on Microsoft Azure. Fastly's participation in this program will give it access to Microsoft's (MSFT) expertise and resources in the metaverse space.

Further, the company also revealed that it was joining the Metaverse Research Hub. This hub is a collaboration between META and other companies to accelerate the development of the metaverse, and will provide Fastly with access to Meta's research and development in the metaverse space.

Moreover, Fastly is partnering with game engine platform developer Unity Software (U) to offer its edge computing services to Unity developers, who create many metaverse applications.

Concerns Remain

Beyond the big earnings win, headwinds continue to persist for Fastly. The company remains unprofitable, although losses have continually narrowed over the past three quarters.

Notably, the total customer count remained almost flat from the prior year (3,072 vs. 3,025 in the prior year). In fact, Fastly reported a sequential decline of 1% in its customer base. A slowdown in a rapidly growing market such as cloud computing is already a worrying sign, and an outright decline even more so.

Finally, the company posted a free cash flow of $7.8 billion for the second quarter, which marks an improvement from the previous year when it reported an outflow. However, the negative free cash flow days are expected to return at Fastly on the back of expected increasing working capital requirements and lower operating margins.

Valuations

Although tech titans such as Microsoft and Amazon are heavily engaged in cloud computing, they have other revenue streams in their businesses, too. So, a reasonable company for comparison with Fastly is Cloudflare (NET) - and Fastly's valuations appear to be much more attractive at current levels. 

On an enterprise value/sales basis, Fastly is trading at 6.26. This is much lower than Cloudflare's EV/Sales ratio of 16.07.

When it comes to price/book ratio, the gap becomes even wider. Fastly is trading at a p/b of 2.66, compared to Cloudflare's 31.19.

Analyst Estimates

Analysts remain confident about the earnings growth prospects for Fastly, with 15.91% growth expected for the current quarter and 25% growth for FY 2023.

Overall, analysts have attributed a “Hold” rating on the stock with a mean target price of $18.17 - about 20% below current levels. Out of 12 analysts covering the stock, 4 have a “Strong Buy” rating, 6 have a “Hold” rating, and 2 have a “Strong Sell” rating.

Final Takeaway

Fastly has carved out a respectable niche in the growing cloud computing space, and its improved results in the latest quarter also point to the fact that the company is on the right path with its strategic moves and partnerships.

However, the company's problems with profitability persist, along with issues around customer concentration and nascent free cash flow generation. Analysts are also cautious about the stock - and there has yet to be any significant post-earnings wave of upgrades or price-target hikes, which suggests these skeptics are standing firm for now.

So, while the metaverse stock boasts impressive returns, it may be wise to proceed with caution on FSLY at current levels, as additional short-term upside may be somewhat limited.