Fastly, Inc.
FSLY has finally fixed growth and profitability, but at $27.33 the stock already discounts much of that turnaround while still carrying concentration, episodic traffic, and execution risk that do not fit a 5.47x sales multiple.
Fastly is no longer the broken story the market knew in 2024. The company has put up a real operating turn, with Q2 2026 revenue of $183.3M, a clean beat over the $170M-$176M guide, and operating income of $27M against a $12M-$16M target. The demand signals also look better than a one-quarter spike. Net retention is 117%, this was the fifth straight quarter of improvement, and RPO reached $341M, up 38% YoY. Security is now a meaningful growth engine, with 43% YoY growth and triple-digit expansion in DDoS and bot management. Those are the right ingredients for a healthier edge platform.
The problem is the stock, not the quarter. At $27.33, investors are paying 5.47x sales for a company that only just exited a deep loss profile and still reported FY2025 EPS of -$0.83, -28.3% operating margin, and $0.0B of free cash flow. That premium might be justified if the revenue base were highly durable and broadly diversified. It is not there yet. Management explicitly said part of the Q2 upside was episodic, with less than half of the beat tied to sporting and one-time events, and the top 10 customers are still 37% of revenue. That is a real issue for a stock that has already rallied 58.68% in 3 months.
The bear case does not depend on the business breaking again. It only requires moderation. Q3 revenue guidance of $184M-$190M still implies 18% annual growth, but the guided operating margin steps down to about 12% from 14.7% in Q2 as hiring and discretionary spend normalize. If growth settles into the low-to-mid teens rather than accelerating further, the valuation premium versus peers becomes hard to defend. With the 10-year Treasury at 4.94%, the market is less willing to pay up for infrastructure software stories that are only now proving sustained profitability.
The case depends on three things. First, security and AI-related traffic must remain strong enough to offset any normalization in live-event demand. Second, operating discipline must hold as OpEx rises in 2H26. Third, concentration cannot worsen from here. Fastly can deliver on all three and still be a decent company. It just does not need to be a good stock at this price. That is why the rating remains SELL, even while the fundamentals are better than they were a year ago.
NRR stays above 115%, security keeps growing above 30%, and AI traffic plus operating leverage support a durable mid-teens margin story into 2027.
Fastly delivers close to FY2026 guidance, but margin normalization and a still-premium valuation settle the shares near the engine target.
Growth slips back toward high single digits as episodic traffic fades, top-customer volatility returns, and the market cuts the premium sales multiple toward peer levels.
Quant call (SELL) diverges from analyst consensus (Buy: 1 buy / 3 hold / 0 sell) — resolve explicitly.
Never, ever invest in the present.
FY2026 guidance now points to a business with real earnings power, not the FY2025 profile of -28.3% operating margin, but the stock is no longer priced on trailing losses and instead assumes that the current 18% growth and positive operating profit can persist. The moat looks better today because edge delivery, security, and developer tooling are selling together, yet over the next 3 to 5 years this remains a competitive market where hyperscalers and larger CDN platforms can compress returns unless Fastly keeps security and AI-related traffic differentiated. AI is a demand tailwind now, as management said, "So we continue to see AI agentic traffic as a tailwind for the business across our existing products. As well as products like bot management and DDoS that help mitigate that.", but AI also raises customer expectations for performance and pricing, which can help traffic while hurting valuation support if margins stall. At $27.33, the market is already paying for the forward recovery, so the rating stays SELL until earnings power catches up to the multiple.
- FY2026 guidance implies 18% growth at the midpoint, a sharp step up from FY2025 revenue growth of 4.4%, showing a real turnaround in demand.
- Valuation is the problem: P/S 5.47x versus peer average 3.5x, despite FY2025 operating margin of -28.3% and only breakeven FCF of $0.0B.
- Customer concentration remains high, with the top 10 at 37% of revenue, while management admitted less than half of Q2's beat came from sporting and one-time events, meaning some upside was non-recurring.
- Q2 2026 revenue of $183.3M beat the $170M-$176M guide, and operating income of $27M beat the $12M-$16M guide, showing much better cost control and flow-through.
- Net retention reached 117%, the fifth straight quarter of improvement, while RPO rose 38% YoY to $341M, supporting the credibility of the FY2026 revenue raise.
- Security is becoming a better business inside the mix, with security revenue up 43% YoY and DDoS plus bot management growing triple digits, which should support gross margin quality.
- Profitability has improved fast: adjusted EBITDA margin reached 21.0% in Q2 2026, up from -6.2% a year earlier and from -1.4% in Q1.
- The stock already prices in a lot of the recovery, trading at 5.47x sales versus 3.5x peers, despite FY2025 EPS of -$0.83 and net margin of -27.7%.
- Management flagged that less than half of Q2's beat came from sporting and one-time events, so not all of the 23% YoY growth rate should be treated as durable.
- Q3 operating margin guidance is only about 12% at the midpoint, down from 14.7% in Q2, because hiring and discretionary spend are ramping in 2H26.
- Concentration risk is still material, with the top 10 customers at 37% of revenue, worse than the 33% level cited on the 2024 Q3 call, showing diversification has not cleanly improved.
| Metric | Value | Context |
|---|---|---|
| Current price | $27.33 | Reference price for the rating |
| Quant price target | $20.89 | -23.6% vs current, Medium confidence, basis: sales_quality_blend |
| FY2025 revenue | $0.6B | Up 4.4% YoY, weak base before the 2026 acceleration |
| FY2025 EPS | $-0.83 | Still loss-making on a trailing basis |
| FY2025 operating margin | -28.3% | Improved from -30.9% prior year, but still deeply negative |
| FY2026 revenue guidance | $732M-$746M | Raised, reflecting 18% annual growth at the midpoint |
| FY2026 operating profit guidance | $88M-$96M | Meaningful move into profitability versus FY2025 losses |
| Q2 2026 adjusted EBITDA | $38.1M | 21.0% margin, up 2,720 bps YoY |
| Valuation, P/S | 5.47x | Above peer average 3.5x |
| Balance sheet | Debt/Equity 0.40, Current ratio 3.36, Total debt $0.4B | Adequate liquidity, manageable leverage |
| Retention and backlog | NRR 117%, RPO $341M | RPO up 38% YoY, best evidence of improving demand durability |
| 52-week position | Range $7.86-$34.82 | Current price is -21.5% vs high and 41.8% above 200-day average |
The biggest risk to the bearish call is that sustained 117% net retention and 38% YoY RPO growth could keep revenue growth near the guided 18% pace into 2027, making the current premium valuation stick longer than expected.
The next catalyst is the November 4, 2026 earnings report, where investors need to see whether Q3 revenue lands within the $184M-$190M guide and whether the guided step-down to roughly 12% operating margin proves conservative.
Ownership is concentrated, with the top three institutions holding 77.8%, which can support the stock while fundamentals improve but can also amplify exits if growth cools. Short interest is elevated at 13.91% of float, or 20.2M shares, though it fell 5.7% and days-to-cover is only 3.3, so this is not an extreme squeeze setup. Options positioning is described as positive gamma, which can dampen near-term volatility, but after a 58.68% three-month move and the stock sitting 41.8% above its 200-day average, positioning looks more like fuel already spent than fresh upside.
Core traffic business remains the base, with Q2 helped by higher traffic at large customers and episodic live events.
Fastest-growing area, with 43% YoY growth in Q2 2026 and triple-digit growth in DDoS and bot management.
Historical compute-led other revenue was growing quickly in 2024, and AI-related workloads remain a stated tailwind.
International cost and bandwidth mix matter to margin, as management previously flagged higher international deployment costs affecting gross margin.
Fastly posted a major Q2 beat and raised FY26 guidance on strong platform adoption.
Execution has improved materially versus the 2024 Q3 setup. Back then management guided Q4 2024 revenue to $136M-$140M, with Ronald Kisling saying, "For the fourth quarter, we expect revenue in the range of $136 million to $140 million, representing flattish annual growth.", and FY2024 free cash flow to -$40M to -$30M. Since then, the company moved from that flattish profile to Q2 2026 revenue of $183.3M, and Richard H. Wong said, "For calendar year 2026, we are raising our revenue guidance to a range of $732 million to $746 million reflecting annual growth of 18% at the midpoint." Profitability also beat what management laid out in 2024, improving from Q3 2024 adjusted EBITDA margin of 9.7% to 21.0% in Q2 2026, and from a Q4 2024 guide for a non-GAAP operating loss of $5M-$1M to FY2026 operating profit guidance of $88M-$96M. The mixed part is concentration and diversification: top 10 customers were 33% of revenue on the 2024 Q3 call and are now 37%, so the business got more profitable and faster-growing without clearly de-risking the customer base. Overall, this is a credible operating team on margins and product monetization, supported by 7 beats in the last 8 reported quarters, but not one that has fully solved concentration or volatility.
In the third quarter, we expect revenue in the range of $184 million to $190 million representing 18% annual growth at the midpoint.
For calendar year 2026, we are raising our revenue guidance to a range of $732 million to $746 million reflecting annual growth of 18% at the midpoint.
Revenue for the second quarter increased 23% year over year, to $183.3 million exceeding the high end of our guidance range $170 million to $176 million.
So we continue to see AI agentic traffic as a tailwind for the business across our existing products. As well as products like bot management and DDoS that help mitigate that.
We believe our gross margins are sustainable at these levels.
Fastly's edge network, developer-focused platform, and security stack create switching friction for customers that need low latency, programmability, and integrated traffic protection. The moat is real but not deep: 117% net retention and $341M of RPO show improving customer commitment, yet the business still operates in categories where larger cloud and network vendors can bundle similar services. Durability improves if security and AI-driven traffic continue to rise as a share of mix, because those products appear to carry better strategic value than pure CDN volume.
Capital allocation looks functional, not shareholder-friendly yet. FY2026 CapEx is still guided to 10%-12% of revenue, with spending front-loaded for supply-chain and capacity needs, while FCF was $0.0B and there were $0.0B in buybacks and dividends. That is sensible for an infrastructure platform in turnaround mode, but it also means equity holders are still funding growth and network build rather than harvesting cash.
FSLY rates a SELL at Medium conviction. The company has executed a real turnaround, and that deserves credit, but the stock has already moved ahead of the fundamentals that still need to mature. At $27.33, investors are paying a premium multiple for a business with improving but not yet proven cash generation, persistent customer concentration, and some non-recurring traffic in the recent beat. A move toward the quant base value of $20.89 is more likely than a sustained breakout from here. The view would change with evidence that security-led growth, 117%+ retention, and positive free cash flow can persist into 2027 without relying on episodic events or a richer multiple.
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Executive Summary
SELL, Medium conviction. FSLY rates a SELL at Medium conviction. The operating story is better, with Q2 2026 revenue up 23%, net retention at 117%, and FY2026 guidance raised to $732M-$746M with $88M-$96M of operating profit, but the stock has run 58.68% in 3 months and now trades well above the quant base value of $20.89. The setup is difficult at 41.8% above the 200-day average and only 21.5% below the 52-week high, because even good execution still leaves valuation rich versus peers and vulnerable to any normalization in traffic or margin.
Investment Thesis
Fastly is no longer the broken story the market knew in 2024. The company has put up a real operating turn, with Q2 2026 revenue of $183.3M, a clean beat over the $170M-$176M guide, and operating income of $27M against a $12M-$16M target. The demand signals also look better than a one-quarter spike. Net retention is 117%, this was the fifth straight quarter of improvement, and RPO reached $341M, up 38% YoY. Security is now a meaningful growth engine, with 43% YoY growth and triple-digit expansion in DDoS and bot management. Those are the right ingredients for a healthier edge platform.
The problem is the stock, not the quarter. At $27.33, investors are paying 5.47x sales for a company that only just exited a deep loss profile and still reported FY2025 EPS of -$0.83, -28.3% operating margin, and $0.0B of free cash flow. That premium might be justified if the revenue base were highly durable and broadly diversified. It is not there yet. Management explicitly said part of the Q2 upside was episodic, with less than half of the beat tied to sporting and one-time events, and the top 10 customers are still 37% of revenue. That is a real issue for a stock that has already rallied 58.68% in 3 months.
The bear case does not depend on the business breaking again. It only requires moderation. Q3 revenue guidance of $184M-$190M still implies 18% annual growth, but the guided operating margin steps down to about 12% from 14.7% in Q2 as hiring and discretionary spend normalize. If growth settles into the low-to-mid teens rather than accelerating further, the valuation premium versus peers becomes hard to defend. With the 10-year Treasury at 4.94%, the market is less willing to pay up for infrastructure software stories that are only now proving sustained profitability.
The case depends on three things. First, security and AI-related traffic must remain strong enough to offset any normalization in live-event demand. Second, operating discipline must hold as OpEx rises in 2H26. Third, concentration cannot worsen from here. Fastly can deliver on all three and still be a decent company. It just does not need to be a good stock at this price. That is why the rating remains SELL, even while the fundamentals are better than they were a year ago.
Key Metrics
| Metric | Value | Context |
|---|---|---|
| Current price | $27.33 | Reference price for the rating |
| Quant price target | $20.89 | -23.6% vs current, Medium confidence, basis: sales_quality_blend |
| FY2025 revenue | $0.6B | Up 4.4% YoY, weak base before the 2026 acceleration |
| FY2025 EPS | $-0.83 | Still loss-making on a trailing basis |
| FY2025 operating margin | -28.3% | Improved from -30.9% prior year, but still deeply negative |
| FY2026 revenue guidance | $732M-$746M | Raised, reflecting 18% annual growth at the midpoint |
| FY2026 operating profit guidance | $88M-$96M | Meaningful move into profitability versus FY2025 losses |
| Q2 2026 adjusted EBITDA | $38.1M | 21.0% margin, up 2,720 bps YoY |
| Valuation, P/S | 5.47x | Above peer average 3.5x |
| Balance sheet | Debt/Equity 0.40, Current ratio 3.36, Total debt $0.4B | Adequate liquidity, manageable leverage |
| Retention and backlog | NRR 117%, RPO $341M | RPO up 38% YoY, best evidence of improving demand durability |
| 52-week position | Range $7.86-$34.82 | Current price is -21.5% vs high and 41.8% above 200-day average |
Financial Strength
The balance sheet is fine for this stage of the turnaround. Debt/equity of 0.40, a 3.36 current ratio, and total debt of $0.4B do not point to near-term financing stress, and the margin trajectory is clearly improving. The real limitation is cash generation quality. FCF is still $0.0B, capex remains elevated at 10%-12% of revenue for 2026, and the quality sub-score for cash flow is only 31. That means Fastly has moved from survival to stabilization, but not yet to a self-funding compounding model that deserves a wide premium.
Competitive Position
Fastly's edge network, developer-focused platform, and security stack create switching friction for customers that need low latency, programmability, and integrated traffic protection. The moat is real but not deep: 117% net retention and $341M of RPO show improving customer commitment, yet the business still operates in categories where larger cloud and network vendors can bundle similar services. Durability improves if security and AI-driven traffic continue to rise as a share of mix, because those products appear to carry better strategic value than pure CDN volume.
Management & Guidance
Current guidance is strong and, on balance, credible. For Q3 2026 the company expects $184M-$190M of revenue, 65% plus or minus 50 bps gross margin, $20M-$24M of operating profit, and $0.11-$0.13 of EPS. For FY2026 it raised revenue to $732M-$746M and operating profit to $88M-$96M after a Q2 beat in revenue, gross margin, and operating income. The company has now beaten EPS expectations in 7 of the last 8 quarters, including a 127.5% beat in August 2026 and 62.5% in May 2026, so management has earned better credibility than it had in 2024. The caution is that some of Q2 was episodic and management itself guided margins lower in Q3 as spending ramps, so the guide should be respected, not extrapolated.
Segment Analysis
- Content delivery and platform revenue (Not disclosed): Core traffic business remains the base, with Q2 helped by higher traffic at large customers and episodic live events.
- Security (Not disclosed): Fastest-growing area, with 43% YoY growth in Q2 2026 and triple-digit growth in DDoS and bot management.
- Compute and other (Not disclosed): Historical compute-led other revenue was growing quickly in 2024, and AI-related workloads remain a stated tailwind.
- Geography (Not disclosed): International cost and bandwidth mix matter to margin, as management previously flagged higher international deployment costs affecting gross margin.
Capital Allocation
Capital allocation looks functional, not shareholder-friendly yet. FY2026 CapEx is still guided to 10%-12% of revenue, with spending front-loaded for supply-chain and capacity needs, while FCF was $0.0B and there were $0.0B in buybacks and dividends. That is sensible for an infrastructure platform in turnaround mode, but it also means equity holders are still funding growth and network build rather than harvesting cash.
Management Execution & Track Record
Execution has improved materially versus the 2024 Q3 setup. Back then management guided Q4 2024 revenue to $136M-$140M, with Ronald Kisling saying, "For the fourth quarter, we expect revenue in the range of $136 million to $140 million, representing flattish annual growth.", and FY2024 free cash flow to -$40M to -$30M. Since then, the company moved from that flattish profile to Q2 2026 revenue of $183.3M, and Richard H. Wong said, "For calendar year 2026, we are raising our revenue guidance to a range of $732 million to $746 million reflecting annual growth of 18% at the midpoint." Profitability also beat what management laid out in 2024, improving from Q3 2024 adjusted EBITDA margin of 9.7% to 21.0% in Q2 2026, and from a Q4 2024 guide for a non-GAAP operating loss of $5M-$1M to FY2026 operating profit guidance of $88M-$96M. The mixed part is concentration and diversification: top 10 customers were 33% of revenue on the 2024 Q3 call and are now 37%, so the business got more profitable and faster-growing without clearly de-risking the customer base. Overall, this is a credible operating team on margins and product monetization, supported by 7 beats in the last 8 reported quarters, but not one that has fully solved concentration or volatility.
Positioning & Flows
Ownership is concentrated, with the top three institutions holding 77.8%, which can support the stock while fundamentals improve but can also amplify exits if growth cools. Short interest is elevated at 13.91% of float, or 20.2M shares, though it fell 5.7% and days-to-cover is only 3.3, so this is not an extreme squeeze setup. Options positioning is described as positive gamma, which can dampen near-term volatility, but after a 58.68% three-month move and the stock sitting 41.8% above its 200-day average, positioning looks more like fuel already spent than fresh upside.
Bull Case
- Q2 2026 revenue of $183.3M beat the $170M-$176M guide, and operating income of $27M beat the $12M-$16M guide, showing much better cost control and flow-through.
- Net retention reached 117%, the fifth straight quarter of improvement, while RPO rose 38% YoY to $341M, supporting the credibility of the FY2026 revenue raise.
- Security is becoming a better business inside the mix, with security revenue up 43% YoY and DDoS plus bot management growing triple digits, which should support gross margin quality.
- Profitability has improved fast: adjusted EBITDA margin reached 21.0% in Q2 2026, up from -6.2% a year earlier and from -1.4% in Q1.
Bear Case
- The stock already prices in a lot of the recovery, trading at 5.47x sales versus 3.5x peers, despite FY2025 EPS of -$0.83 and net margin of -27.7%.
- Management flagged that less than half of Q2's beat came from sporting and one-time events, so not all of the 23% YoY growth rate should be treated as durable.
- Q3 operating margin guidance is only about 12% at the midpoint, down from 14.7% in Q2, because hiring and discretionary spend are ramping in 2H26.
- Concentration risk is still material, with the top 10 customers at 37% of revenue, worse than the 33% level cited on the 2024 Q3 call, showing diversification has not cleanly improved.
Valuation & Price Target
Engine price target $20.89 (-23.6% vs current), Medium confidence.
- P/S Multiple: $15.76 (45% weight)
- Quality-adjusted: $27.55 (20% weight)
- DCF: $27.58 (15% weight)
The rating aligns with the quant baseline SELL and does not need a heroic disagreement. The engine's $20.89 target sits below the current $27.33, and the setup supports that caution: valuation is rich at 5.47x sales versus 3.5x peers, the stock is up 58.68% in three months, and FY2025 still showed -28.3% operating margin with $0.0B of FCF. The better part of the story is real, with FY2026 revenue guided to $732M-$746M, operating profit to $88M-$96M, and 117% net retention, which explains why the quality-adjusted and DCF methods are much higher at $27.55 and $27.58. But that upside is offset by concentration at 37% of revenue for the top 10, some episodic contribution to the quarter, and premium valuation after a sharp rerating. Sell-side consensus is mildly positive at 1 buy and 3 holds, but that is low-signal context and less useful than the valuation-to-execution mismatch now visible in the numbers.
Risk Assessment
Risk score 58/100 (Moderate). The biggest risk to the bearish call is that sustained 117% net retention and 38% YoY RPO growth could keep revenue growth near the guided 18% pace into 2027, making the current premium valuation stick longer than expected.
The Bottom Line
FSLY rates a SELL at Medium conviction. The company has executed a real turnaround, and that deserves credit, but the stock has already moved ahead of the fundamentals that still need to mature. At $27.33, investors are paying a premium multiple for a business with improving but not yet proven cash generation, persistent customer concentration, and some non-recurring traffic in the recent beat. A move toward the quant base value of $20.89 is more likely than a sustained breakout from here. The view would change with evidence that security-led growth, 117%+ retention, and positive free cash flow can persist into 2027 without relying on episodic events or a richer multiple.
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