Fastly (FSLY)

Edge cloud platform Fastly (NYSE:FSLY) reported Q4 CY2025 results beating Wall Street’s revenue expectations, with sales up 22.8% year on year to $172.6 million. On top of that, next quarter’s revenue guidance ($171 million at the midpoint) was surprisingly good and 6.9% above what analysts were expecting. Its non-GAAP profit of $0.12 per share was significantly above analysts’ consensus estimates.

Company Overview

Taking its name from the core advantage it delivers to customers, Fastly (NYSE:FSLY) operates an edge cloud platform that processes, secures, and delivers web content as close to end users as possible, enabling faster digital experiences.

The amount of content on the internet is exploding, whether it is music, movies and or e-commerce stores. Consumer demand for this content creates network congestion, much like a digital traffic jam which drives demand for specialized content delivery networks (CDN) services that alleviate potential network bottlenecks.

Fastly competes with legacy CDN providers like Akamai and Edgio, security-focused vendors such as Cloudflare and F5, as well as cloud giants AWS, Google Cloud, and Microsoft Azure which offer their own content delivery and edge computing capabilities.

Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last five years, Fastly grew its sales at a 16.5% annual rate. Though this growth is acceptable on an absolute basis, we need to see more than just topline growth for the software sector, which can display significant earnings volatility. This means our bar for the sector is particularly high, reflecting the non-essential and hit-driven nature of the products and services offered. Additionally, five-year CAGR starts around Covid, when revenue was depressed then rebounded.

We at StockStory place the most emphasis on long-term growth, but within software, a half-decade historical view may miss recent innovations or disruptive industry trends. Fastly’s recent performance shows its demand has slowed as its annualized revenue growth of 11.1% over the last two years was below its five-year trend. We’re wary when companies in the sector see decelerations in revenue growth, as it could signal changing consumer tastes aided by low switching costs.

This quarter, Fastly reported robust year-on-year revenue growth of 22.8%, and its $172.6 million of revenue topped Wall Street estimates by 6.9%. Company management is currently guiding for a 18.4% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 6.9% over the next 12 months, a deceleration versus the last two years. This projection doesn't excite us and implies its products and services will see some demand headwinds.

One of the best parts about the software-as-a-service business model (and a reason why they trade at high valuation multiples) is that customers typically spend more on a company’s products and services over time.

Fastly’s net revenue retention rate, a key performance metric measuring how much money existing customers from a year ago are spending today, was 105% in Q4. This means Fastly would’ve grown its revenue by 5% even if it didn’t win any new customers over the last 12 months.

Trending up over the last year, Fastly has an adequate net retention rate, showing us that it generally keeps customers but lags behind the best SaaS businesses, which routinely post net retention rates of 120%+.

For software companies like Fastly, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.

Fastly’s gross margin is substantially worse than most software businesses, signaling it has relatively high infrastructure costs compared to asset-lite businesses like ServiceNow. As you can see below, it averaged a 57.1% gross margin over the last year. That means Fastly paid its providers a lot of money ($42.92 for every $100 in revenue) to run its business.

The market not only cares about gross margin levels but also how they change over time because expansion creates firepower for profitability and free cash generation. Fastly has seen gross margins improve by 4.4 percentage points over the last 2 year, which is very good in the software space.

Fastly’s gross profit margin came in at 61.4% this quarter, up 8 percentage points year on year. Fastly’s full-year margin has also been trending up over the past 12 months, increasing by 2.6 percentage points. If this move continues, it could suggest better unit economics due to more leverage from its growing sales on the fixed portion of its cost of goods sold (such as servers).

Fastly’s expensive cost structure has contributed to an average operating margin of negative 19.1% over the last year. Unprofitable software companies require extra attention because they spend heaps of money to capture market share. As seen in its historically underwhelming revenue performance, this strategy hasn’t worked so far, and it’s unclear what would happen if Fastly reeled back its investments. Wall Street seems to think it will face some obstacles, and we tend to agree.

Over the last two years, Fastly’s expanding sales gave it operating leverage as its margin rose by 11.8 percentage points. Still, it will take much more for the company to reach long-term profitability.

This quarter, Fastly generated a negative 8.7% operating margin. The company's consistent lack of profits raise a flag.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Fastly has shown weak cash profitability over the last year, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 7.3%, subpar for a software business.

Fastly’s free cash flow clocked in at $8.60 million in Q4, equivalent to a 5% margin. Its cash flow turned positive after being negative in the same quarter last year, but we wouldn’t put too much weight on the short term because investment needs can be seasonal, causing temporary swings. Long-term trends carry greater meaning.

Over the next year, analysts predict Fastly’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 7.3% for the last 12 months will decrease to 7%.

Companies with more cash than debt have lower bankruptcy risk.

Fastly is a well-capitalized company with $361.8 million of cash and $106.9 million of debt on its balance sheet. This $254.9 million net cash position is 18.3% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We were impressed by Fastly’s optimistic EPS guidance for next quarter, which blew past analysts’ expectations. We were also excited its EBITDA outperformed Wall Street’s estimates by a wide margin. Zooming out, we think this was a good print with some key areas of upside. The stock traded up 13.6% to $10.59 immediately after reporting.

Updated: February 11, 2026 at 11:11 PM EST

Before deciding whether to buy Fastly or pass, we urge investors to consider business quality, valuation, and the latest quarterly results.

We see the value of companies addressing major business pain points, but in the case of Fastly, we’re out. First off, its revenue growth was mediocre over the last five years, and analysts expect its demand to deteriorate over the next 12 months. While its expanding operating margin shows it’s becoming more efficient at building and selling its software, the downside is its operating margins reveal poor profitability compared to other software companies. On top of that, its gross margins show its business model is much less lucrative than other companies.

Fastly’s price-to-sales ratio based on the next 12 months is 2x. While this valuation is fair, the upside isn’t great compared to the potential downside. There are superior stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $10.57 on the company (compared to the current share price of $11.05).