Cloudflare vs Fastly Stock: Which Is Best?

Cloudflare Inc (NYSE:NET) and Fastly Inc (NYSE:FSLY) are cloud computing companies that experienced massive market capitalization increases in 2020 when everything from businesses to schools and even entertainment went online. The effect was an ever larger cloud-based world.

But which is the better investment between Cloudflare vs Fastly stock?

The technology infrastructure being built today will likely last long into the future, but it’s unclear whether it will be in demand to the same extent when economies return to normalcy. This creates a lot of uncertainty among investors of these cloud companies.

When vaccines were announced by year end, Fastly dipped, but Cloudflare continued growing. Much of this is because sales easily outpaced analyst expectations while a major hack on SolarWinds and FireEye gave it a spotlight to shine.

Security is more important than ever in a cloud-based society. If these companies can provide a unique value-add not already offered by bigger competitors with massive data centers, they could be the next big things. What are the odds?

Cloudflare “Zero Trust” Is A Competitive Advantage

Cloudflare is a relatively young company; it was founded in 2009. It held its initial public offering in September 2019, and raised $525 million with a market valuation of $4.4 billion. Buzz around the company was relatively mild until the pandemic hit.

The cloud company’s market capitalization ballooned to over $25 billion, and share prices jumped from a 52-week low of $15.05 to trade in the $80-$90 range by year end.

Much of this is because of the company’s “zero trust” approach to cybersecurity. Like bulkheads in a ship, each individual section of data is completely locked off. This minimizes the access would-be cybercriminals could gain by hacking the system.

Like any data center, Cloudflare’s main revenue stream is in selling data access through bandwidth. Underneath all the bells and whistles, it essentially buys in bulk and sells at retail for a profit. This means it profited when the businesses and consumers were forced online in larger numbers.

Web-based companies that use Cloudflare include 1-800-Flowers, 23andMe, 9Gag, Axios, Curse, Discord, FindLaw, Garmin, HubSpot, Mozilla, Ok Cupid, Reddit, Shift, Shopify (SHOP), and Thomson Reuters.

In fact, Cloudflare’s partnership with Shopify (SHOP) helped it grow large enough to compete with enterprise tech giant Microsoft (MSFT). But is it enough to outperform Fastly?

Is Fastly An Acquisition Target?

Fastly is also a young company, founded in 2011 in the same hometown of San Francisco. Still, it beat Cloudflare to the punch in going public – its IPO was held in May 2019 offering 11.25 million shares of Class A common stock for $16 per share. It raised $180 million with an initial market cap of $1.45 billion.

In 2020, Fastly’s market cap jumped over $11 billion, with share prices rocketing from a 52-week low of $10.63 per share to a high of $136.50 before settling in the $90-$100 range by year end.

Like Cloudflare and Akamai Technologies (AKAM), Fastly is a content delivery network (CDN) that offers secure, cloud-based data access. This gives it the same revenue streams, although competitors are rapidly upgrading their systems.

Much of the hype around Fastly may be speculation of an acquisition. Cisco (CSCO) was rumored to be shopping for it, but any big tech company could afford to buy either of these companies.

Although Cisco may not be the ultimate buyer, the expense of scaling data centers could put the company in the right position for an acquisition.

This idea could have ballooned the stock to levels it can’t maintain much longer.

Can Cloudflare Top Brass Compete With Titans? 

According to eagle-eyed watchers of Cloudflare, one of the biggest risks to investors is its unproven COO and president.

Co-founder Michelle Zatlyn has deep experience working within the company, but it’s unclear how well she can steer a $25 billion company past multi-trillion-dollar titans.

Still, her team all vouches for her, and some analysts bet that she could very well scale the company to $100 billion plus.

And the company risks a second dotcom bubble combatting some of its growth. Shopify is a major partner, and both benefited from the move to virtual. Like video rental stores and theaters, things we take for granted now may not always be a part of everyday life.

Should small businesses struggle, these companies could find themselves seeking an exit strategy in the form of mergers and acquisitions. Whether it’s with each other or being consumed by another competitor remains to be seen.

Fastly Got Seriously Hurt By TikTok Ban

Fastly already had a turbulent 2020 that highlighted its risks. President Trump’s White House made popular app TikTok the target of the U.S.-China trade war. Having your biggest customer banned from the country isn’t a great way to impress investors.

Some analysts believe tech companies like Zoom (ZM), Fastly, and Snowflake (SNOW) will prove to be overvalued once a return from online to offline kicks into high gear. The year already saw some major tech IPOs like DoorDash and Airbnb (ABNB) fail to sustain value.

With customers already pulling back spending during a cold winter for the stock market, Fastly could find itself in need of cash quicker than it’s forecasting. And a buyout isn’t guaranteed, at least not at prices that will warm investors’ hearts.

Fastly Vs Cloudflare Stock: The Bottom Line

Cloudflare and Fastly are cloud-based companies that were in the right place at the right time to profit in the coronavirus pandemic. As the world went virtual, both companies saw exponential gain in market capitalization and revenue growth.

However, Fastly was hit hard when its biggest customer TikTok got banned, showing just how fragile the tech ecosystem is.

Both companies are valued much higher than they were before economic restrictions. And many analysts believe so-called “pandemic stocks” have legs in 2021. Be sure to keep an eye on earnings reports and market conditions if you choose to invest. 

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.