Fastly (FSLY): Strong Earnings, Growing Security Business, Attractive Valuation

An under-the-radar cloud turnaround story.

Fastly (FSLY) has gone from a forgotten SaaS laggard to one of the market’s more convincing turnaround stories. Shares are up more than 150% over the past year, yet the stock still trades like a company in recovery rather than one regaining its footing.

This isn’t a momentum mirage. Under new leadership, Fastly is executing with far more discipline, pairing renewed growth with expanding margins and improving cash generation - two things that long eluded the story. What’s changed is not just the stock price, but the underlying business. And that shift suggests the rally may have further to run.

Fastly isn’t your typical SaaS platform or just another CDN provider. Once known primarily for edge infrastructure and content delivery, the company has evolved into a broader enterprise-grade platform that blends security, performance, and developer-centric tooling.

At the center of Fastly’s strategy is the shift toward programmable edge compute and modern security architecture. The platform now delivers a unified stack that includes network acceleration, observability tools, and a fast-growing application security suite - supporting some of the internet’s most demanding workloads in media streaming, e-commerce, and real-time applications.

What’s powering the recent turnaround is execution. Under new leadership, Fastly is delivering consistent revenue acceleration, margin expansion, and improving cash flow - three things that proved elusive in prior years. Security revenue is growing at a 30%-plus clip, and AI is being layered into the edge network, positioning Fastly more like an enterprise cloud enabler than a commodity CDN.

Meanwhile, competitors like Cloudflare and Akamai still dominate the narrative, but Fastly is quietly playing the underdog with real traction. Enterprise customer count continues to climb, retention is improving, and multi-product wins are starting to show up in the numbers - including a recent cross-sell into all three product lines with a top-10 strategic customer. Those are the kinds of signals investors look for when judging whether a platform has genuine product-market fit.

Fastly’s Q4 2025 earnings, released on February 11, marked a clear inflection point - and the market wasted no time recognizing it. Shares surged more than 50% in a single session as investors reacted to a quarter that delivered simultaneously on growth, margins, and cash generation.

Revenue rose 23% year over year to a record $172.6 million, exceeding expectations and underscoring accelerating demand across the platform. Security products continued to lead, growing 32%, while gross margins climbed to an all-time high of 61% (64% on a non-GAAP basis). For a company long viewed as operationally inconsistent, the quarter provided concrete evidence that execution is tightening and the business model is scaling.

That progress carried through the income statement and cash flow. Fastly generated $21 million in non-GAAP operating income, $8.6 million in positive free cash flow, and non-GAAP net income of $20 million, or $0.12 per share - the strongest profitability showing in the company’s history. Just as important, remaining performance obligations surged to a record $354 million, up 55% year over year, signaling growing multi-year customer commitments and improved revenue visibility.

GAAP losses remain, largely due to elevated stock-based compensation, but the underlying profitability trend is becoming increasingly difficult to dismiss. Adjusted EBITDA reached $26 million in Q4, up 189% sequentially, reflecting both operating leverage and tighter cost control.

Management’s 2026 outlook reinforces that momentum. Fastly guided to $700–$720 million in revenue, up from $624 million in 2025, alongside as much as $60 million in adjusted operating income and double-digit free cash flow margins. It’s an ambitious target - but one that appears consistent with the direction of recent quarters rather than a leap of faith.

Enterprise traction adds another layer of support. Fastly now serves 628 enterprise customers, up 9% year over year, while revenue from its top ten customers outpaced overall growth. Net revenue retention climbed to 110%, signaling both expanding customer spend and improved platform stickiness. Together, those trends point to a business that’s not just growing - but maturing in the ways long-term investors care about.

Fastly shares are up more than 150% over the past year, driven by materially better execution and a clear improvement in underlying fundamentals. Yet despite that rally, the stock continues to trade at roughly 4x trailing sales and about 3x book value - multiples that sit closer to mid-tier SaaS peers than to best-in-class infrastructure names such as Cloudflare or Zscaler.

That disconnect appears less about the numbers and more about lingering skepticism. Of the 11 analysts covering Fastly, only three currently rate the stock a “buy,” with most maintaining “hold” ratings and one at “sell.” The average price target remains near $13 - well below recent trading levels around $18 - suggesting that consensus estimates have yet to fully absorb the implications of February’s beat-and-raise quarter.

Source: Barchart

If Fastly executes on its 2026 guidance - $700–$720 million in revenue and adjusted operating margins up to 8%- the current valuation would likely prove too conservative. That case strengthens if security remains a primary growth driver, customer retention continues to improve, and the balance sheet stays stable following the recent convertible note issuance and debt restructuring.

The main risks are structural rather than cyclical. A concentrated customer base means results can swing if spending patterns change at the top end, and Fastly still needs to prove it can grow security and enterprise revenue while expanding margins without relying on aggressive capacity or headcount buildouts.

Even accounting for the risks, the setup now looks more favorable. The recent pullback across the SaaS sector has reset valuations, creating a more supportive backdrop than existed late last year. Against that backdrop, Fastly remains priced for caution despite clear improvements in execution - making the stock look less like a recovery bet and more like an underappreciated re-rating candidate.