Which stock has the most upside potential?
The coronavirus pandemic has made businesses, educational institutions and other organizations more dependent on the use of remote tools than ever and accelerated the shift to the cloud. The increase in internet traffic has brought the CDN (Content Delivery Network) and leading IT companies like Akamai Technologies, Cloudflare, Fastly, and Limelight Networks to the fore.
In addition, these companies are also seeing a higher demand for their cybersecurity solutions, as remote working and increased reliance on the internet have increased the risk of malicious cyber attacks.
Using TipRanks’ stock comparison tool, we’ll place Cloudflare and Fastly side-by-side to see which stock offers a better investment opportunity.
Cloudflare (REPORT)
Cloudflare’s global cloud platform provides a wide range of network services, including website and application security against cyber attacks and CDN solutions that ensure faster delivery of internet content. Cloudfare‘s revenue grew at a compound annual rate of 50% from 2016 to 2019, and the company currently has over 3 million customers.
The pandemic-triggered work-from-home trend helped Cloudflare grow its paying customer base 24% year-over-year to 96,178 in the second quarter. Large customers (those who pay more than $ 100,000 per year) have increased by 65%. In these difficult times, the company offers concessions and allows deferral of payment to certain customers who need it.
The larger customer base drove Cloudflare’s second quarter revenue up 48% to $ 99.7 million. The adjusted loss per share during the period fell to $ 0.03 from a loss per share of $ 0.22 a year ago. The company’s gross margin is also noteworthy, which contracted year-over-year but still stood at 75.8% (adjusted to 76.8%) in the second quarter.
Going forward, Cloudfare forecasts revenue growth in the range of 39% to 40% in the third quarter and 41% to 42% for the full year.
Cloudflare is present in more than 100 countries and international activities represented more than 50% of its revenue in the second quarter. It continues to invest in international growth as part of its strategy to expand its global customer base.
Robert W. Baird analyst Jonathan Ruykhaver raised his share price target to $ 48 from $ 45 on August 7 following better-than-expected second quarter results and revenue expectations for the whole year. The analyst maintained a buy rating.
“We see the company continuing to leverage an innovative platform of products addressing security, performance and various other use cases. Ruykhaver said in a note to investors. “We love the story and see a long tail wind for growth as the company continues to move upmarket while continuing to offer innovative products.” (See the analysis of NET stocks on TipRanks)
Overall, the Street has a strong buy analyst consensus on the stock based on 10 buys versus 2 takes. With stocks up 104% year-to-date, analysts’ average price target of $ 48.25 implies upside potential of another 38.8% over the next 12 months.
Quickly (FSLY)
The shares of tech specialist Fastly have jumped 303% since the start of the year. Fastly’s state-of-the-art computing platform processes data and applications closer to end users and delivers improved speed and efficiency. Amid the pandemic, the company is seeing strong adoption of its edge platform, CDN, and security products by new and existing customers.
The number of customers of the company increased by approximately 20% year-on-year to 1,951 in the second quarter. In addition, Fastly’s corporate customers (revenues over $ 100,000 per year) increased 16% to 304. Corporate customers generated 88% of revenues for the past 12 months to June 30.
The company’s net retention rate increased to 137.8% from 110.9% in the second quarter of 2019. Overall, the accelerated digital transformation needs during the current crisis have fueled a 62% increase in revenue Fastly’s sales in the second quarter to $ 74.7 million.
Strong revenue growth and an increase in adjusted gross margin to 61.7% from 55.6% in the second quarter of 2019 helped the company move to adjusted EPS of $ 0.02 from adjusted loss per share of $ 0.16 in the same quarter last year.
However, the bullish performance was overshadowed by Fastly’s revelation that China-based TikTok is its biggest customer and contributed 12% of the company’s revenue in the first half of 2020. Investors see this as a risk. major because President Trump has called for a ban on TikTok in the United States if its owner ByteDance does not sell the app to a US company by September 15.
Growth beyond the domestic market is vital for Fastly. At the end of June, 52% of the company’s customers came from international markets. The company is increasing the number of POPs (points of presence) at certain international sites in order to attract more customers.
Meanwhile, Fastly continues to expand the availability of Compute @ Edge and invest in its enhancements. It is also expanding its security offerings with the recently announced acquisition of web application security company Signal Sciences.
Following the acquisition of Signal, Credit Suisse analyst Brad Zelnick raised the share price target to $ 110 from $ 100 on August 28 and maintained its buy rating. Zelnick believes that “the agreement advances Fastly’s position on edge security, particularly in the context of DevSecOps, and in a way that differentiates itself from previous generation technology.”
The analyst added: “In addition to TAM [Total Addressable Market] expansion and the likelihood of synergies, the deal appears to be both growth and GM [Gross Margin] accretive on a stand-alone basis. (See the analysis of FSLY shares on TipRanks)
The rest of the street is cautiously bullish on the stock. The moderate buy analyst consensus is based on 7 buy, 3 take and 2 sell. The analysts’ average price target of $ 92.38 suggests further upside potential of 14.2% over the next 12 months.
Conclusion
Cloudflare and Fastly are both expected to benefit as more businesses migrate to the cloud. Currently, both stocks have high valuations. However, Cloudflare’s higher margins and the stock’s greater upside potential make it more favorable than Fastly.
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Disclaimer: The opinions expressed in this article are solely those of the analysts presented. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment