What is the best performing tech stock during the pandemic? (Hint: It's not Zoom)

A smaller and lesser-known company has dethroned Zoom Video Communications (NASDAQ: ZM) as the best performing tech stock during the Covid-19 pandemic.

With a market capitalisation of US$8.7 billion (S$12 billion), Fastly (NYSE: FSLY) is a mere one-tenth the size of Zoom but it is rapidly gaining investors' attention as demonstrated by its meteoric share price rise.

The stock market peaked on February 19 (the S&P 500 index closed that day at its all-time high). Over the same period, Zoom is up 152 per cent while Fastly has surged 249 per cent.

Today, we examine Fastly's business and growth outlook and opine as to whether it remains a good buy despite its recent share price surge.

A content delivery provider

Founded in 2011, Fastly is a cloud-based content delivery network (CDN) provider that helps businesses speed up their internet traffic in a scalable and secure way.

Businesses use the company's system of strategically-placed data centre infrastructure across 53 markets to shorten the response time and delivery of digital experiences such as video streaming, mobile applications and other internet-connected digital interactions.

Fastly's infrastructure also helps such web services stay available when there are surges in internet traffic.

In the first quarter of 2020, Fastly boasted a 38 per cent year over year increase in revenue. This was driven by a 22 per cent increase in the number of enterprise customers (i.e. those who spend US$100,000 or more over a 12-month period) from 243 to 297 over the same period.

Existing customers are also spending more with Fastly, as evidenced by the company's impressive dollar-based net expansion rate of 133 per cent (which means that customers spent 33 per cent more for the first quarter year over year).

This is also a strong testament to Fastly's successful "land and expand" strategy - on average, customers have increased their annual spend by more than 20 per cent year over year since 2014, growing from an average last 12-months revenue of US$35,000 to over US$110,000 in 2019.

The top choice

While Fastly is not the only CDN provider in the world, it is the top choice vendor for many technology and cloud customers who are at the forefront of next-generation applications.

They include Shopify Inc. (NYSE: SHOP), Spotify Technology S.A. (NYSE: SPOT), Slack Technologies (NYSE: WORK), and GitHub which is owned by Microsoft Corporation (NASDAQ: MSFT).

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In the current pandemic-driven economy, many of these customers experience high growth in usage, which ultimately benefits Fastly.

For example, Shopify's recent partnership with retail giant Walmart Inc. (NYSE: WMT) allows more than 1,000 of Shopify's highest-performing merchants to sell their wares on Walmart.com.

This is expected to strengthen Walmart's e-commerce operations while giving Shopify's merchants access to a larger market.

Fastly therefore stands to gain tremendously from Walmart's escalating e-commerce traffic (Walmart's online retail sales soared 74 per cent year over year in the first quarter) as well as Shopify's continued expansion.

It is therefore no surprise that management is bullish about Fastly's growth - it recently raised its guidance and now expects full year 2020 revenue to be between US$280 million to US$290 million, up from a previous range of US$255 million to US$265 million.

Get Smart: Add this company to your watchlist

However, it should be noted that the company is not profitable and that it reported a net loss of US$51.6 million in 2019. This is unsurprising, considering that Fastly continues to invest heavily in its network infrastructure, R&D and marketing to expand its global footprint.

We believe that Fastly is on the cusp of an exciting growth story and is in a good position to profit from powerful trends such as e-commerce, telecommuting and digital entertainment.

Investors can consider adding Fastly to their growth stock portfolio watchlist while monitoring its progress in achieving better operating leverage as it scales up its business to the next level.

This article was first published in The Smart Investor.