Fastly's AI-Driven Stock Rally Lacks Substance, Citi Analyst Says

Shares of Fastly (NYSE: FSLY) fell 9% on Thursday, erasing a significant portion of the 14% gain from the previous day, after a Citi analyst questioned the financial substance behind the company's AI-driven rally. The initial surge was triggered by reports that Fastly's network is a key provider for Meta's new AI assistant, Muse.

In a research note, Citi analyst Fatima Boolani maintained a Neutral rating on Fastly, arguing that the increased traffic from Meta's AI assistant is unlikely to translate into the significant revenue required to justify the stock's sharp rise. The bank expressed skepticism about Fastly's ability to effectively monetize this new type of activity.

The Monetization Problem

Citi's primary concern centers on Fastly's pricing model and the nature of AI-generated traffic. The bank highlighted several key issues:

• Pricing Structure: Fastly primarily charges customers based on the volume of data transferred (per gigabyte). AI assistants like Muse generate a high number of small, quick requests rather than large file transfers. A per-request pricing model would be more lucrative for this type of traffic, but there is no indication Fastly is using one for this service.
• Low-Margin Services: The analysis suggests Fastly is providing basic, low-profit data delivery for Meta. There is little evidence that Meta is also purchasing Fastly's higher-margin security products, such as bot protection, which are a key driver of the company's profitability.
• Unproven Upsell: While Fastly has noted that popular AI assistants are driving traffic, Citi needs to see concrete evidence that the company can successfully upsell its more profitable security and add-on services to these major tech clients before becoming more constructive on the stock.

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Cloudflare Seen as a Better AI Play

While acknowledging Fastly's comparatively low valuation, Citi stated its preference for competitor Cloudflare (NYSE: NET) as a superior investment in AI infrastructure, despite its higher stock price. The bank believes Cloudflare's premium is justified by its proven ability to monetize new technologies and its more comprehensive suite of tools.

According to the note, Cloudflare is better positioned for future AI developments, such as assistants on wearable devices where privacy rules are stricter. The company has also already launched specific tools to manage AI bots and process AI-driven transactions, giving it a head start in capitalizing on the trend. Investors will be closely watching Fastly’s next earnings report for any signs that its optimistic AI narrative is translating into tangible revenue growth.