Fastly: failing upward cannot be a long-term strategy

Equity markets are usually quick to mark down a company in trouble. Yet Fastly’s share price rose 11 per cent on Tuesday after a glitch that crashed websites of customers including Amazon, Hulu, CNN and, full disclosure — the Financial Times. Instead of punishing the web services group for its mistake, investors appeared to reward it for inadvertently demonstrating its importance. 

Failing upwards is not unheard of. Golden goodbyes prove that. After WeWork’s dramatic implosion in 2019, founder Adam Neuman was able to walk away with a near $1.7bn exit package.

Share price rises may equally buoy businesses if their problems are not as bad as feared. Facebook’s share price rose after reports that the Federal Trade Commission would fine it $5bn for privacy violations on the basis that the penalty could have been worse. The fine was a record for the FTC but was less than a quarter of Facebook’s annual profit.

Similarly, when UBS was fined $1.5bn by US, UK and Swiss regulators for its role in the Libor-rigging scandal, shares rose.

Fastly, a $6.5bn San Francisco-based company that helps websites such as Amazon and Reddit to load web pages quickly, may also have been rewarded for resolving its problem in the space of two hours. 

Since listing in early 2019, Fastly’s share price has jumped from $16 to $56. It offers a content delivery network service that puts servers close to users. This market is concentrated. Akamai, Fastly and Cloudflare dominate, though Amazon is investing in the area.

The volume of web traffic is rising, strengthening Fastly’s position further. In the pandemic, Comcast reported peak US internet traffic up almost a third on the previous year. Fastly revenues grew 35 per cent to $35m in the first quarter of 2021. 

The problem is that the extraordinary jump in web traffic last year makes for hard comparisons this year as the world opens up.

Fastly’s net retention rate, which measures recurring revenue from existing customers, was 107 per cent in the first quarter of this year, down from 130 per cent in the same quarter last year. It also lost business from Chinese TikTok owner ByteDance in 2020.

Even after the price rise on Tuesday, Fastly shares are down 35 per cent this year. After the events of this week, both net retention and the share price may slip even further.

The Lex team is interested in hearing more from readers. What is your view of the Fastly outage? Please tell us what you think in the comments section below