Fastly’s AI rebound still has cost questions
- Q1 2026 revenue grew 20% year over year to $173.0 million, a clear step up from 15% growth in 2025.
- Security grew 47% year over year to $38.8 million and reached 22% of revenue.
- Other revenue, driven mainly by Compute, grew 67% year over year to $8.0 million.
- The record 65.1% gross margin had help from a 190 basis point accounting benefit.
- Memory component prices rose 2 to 3 times, so the AI traffic story must prove it can earn good margins.
A faster rebound, with strings attached
Fastly’s turnaround is now showing up in the numbers. Q1 2026 revenue rose 20% year over year to $173.0 million. That is a major change from the slower growth the company was fighting through before 2025.
The bull case is that Fastly is becoming a key layer for AI-heavy internet traffic. Security and Compute are no longer side stories. Security reached 22% of revenue after growing 47% year over year, while Other revenue, driven mainly by Compute, grew 67%. Products like ContentGuard and AI Bot Management fit the same theme: help customers control bots, AI agents, and high-volume traffic at the edge.
The bear case is that the growth may be expensive to serve. Q1 gross margin hit 65.1%, but 190 basis points came from a one-time accounting policy change on server useful life. Management also flagged memory component prices rising 2 to 3 times, which forced Fastly to spend earlier on infrastructure.
That makes the next few quarters important. If Fastly can hold near 20% growth while keeping margins steady without accounting help, the AI edge thesis gets stronger. If growth slows or hardware costs eat the margin gains, the stock’s already demanding valuation becomes harder to defend.
Usage fees on the internet edge
Fastly sells a software-driven edge network. That means it moves and protects customer traffic from servers closer to the end user, instead of forcing every request back to a faraway data center.
Customers pay mainly based on usage across delivery, security, compute, and observability services. When customer traffic rises, Fastly can earn more. That works well if the extra traffic carries strong margins.
The risk is that AI traffic can be heavy and costly. Bots, agents, and large model apps can create huge request volumes. Fastly needs to charge enough for that work while buying servers, memory, and network capacity at reasonable costs.
Fastly is also trying to lower its dependence on a small set of large customers. In Q1 2026, the top 10 customers were still 34% of revenue. That concentration can help growth when big accounts expand, but it can hurt if one large customer leaves or cuts usage.
From CDN roots to AI control
Delivery and Network Services
This is the core content delivery network business. It caches and speeds up websites, apps, and media traffic.
Security
This includes web application firewall, bot mitigation, DDoS protection, ContentGuard, and API Discovery. It grew 47% year over year in Q1 2026 and is the clearest growth engine.
Compute
Compute lets developers run code closer to users. It helped drive Other revenue up 67% year over year in Q1 2026, but it is still small.
Observability
These tools help customers see how their apps and traffic are performing. They support the wider platform by making Fastly easier to manage.
AI Accelerator
This product acts as an AI proxy for apps using large language models. It uses semantic caching, which means it can reuse similar AI answers to cut cost and speed up responses.
Fastly Agent Toolkit
This toolkit is aimed at AI coding agents. It gives Fastly another way to be part of developer workflows as AI tools create more internet traffic.
Q1 mix: still network-led
Fastly does not report formal operating segments, so this mix uses Q1 2026 revenue categories. The top 10 customers were 34% of revenue in Q1 2026, so customer concentration remains a real caveat.
What could break the rebound
AI traffic costs more than it pays
High impact · Medium oddsFastly wants to be the intelligence layer for AI-driven traffic. That only works if it can charge more than it costs to serve the traffic. The company itself added a risk that managing AI-related traffic costs could harm the business.
Hardware inflation hits margins
High impact · Medium oddsManagement flagged memory component prices rising 2 to 3 times. Fastly had to pull forward infrastructure spending to secure capacity. If those costs stay high, the Q1 margin strength may not repeat.
Growth re-acceleration fades
High impact · Medium oddsThe current thesis leans on Q1 2026 revenue growth of 20%. If that rate drops back toward the 2025 level of 15% or lower, investors may question whether AI traffic is really changing Fastly’s growth path.
Security stalls before scale
Medium impact · Medium oddsSecurity is now 22% of revenue and grew 47% year over year in Q1 2026. That makes it important to the bull case. If cross-selling slows, Fastly may look too dependent on its slower Network Services base.
Large customers cut usage
Medium impact · Medium oddsThe top 10 customers represented 34% of revenue in Q1 2026. That is a lot of revenue tied to a small group. Usage-based revenue can fall quickly if a large customer optimizes traffic or moves workloads.
In one breath
What does Fastly actually do?
Fastly runs an edge cloud network. It helps websites, apps, APIs, and media load faster and stay safer by handling traffic closer to users.
Why does AI matter for Fastly?
AI agents and AI apps can create more internet traffic and more bot-like activity. Fastly is building products such as ContentGuard and AI Accelerator to help customers control and speed up that traffic.
Is Fastly profitable because gross margin hit 65.1%?
The 65.1% Q1 2026 gross margin was strong, but it needs context. It included a 190 basis point one-time benefit from an accounting policy change, while memory prices rose 2 to 3 times.
What is the main thing to watch next?
Watch whether revenue growth stays near 20% and whether gross margin holds without accounting help. Those two signals will show whether the AI traffic thesis is becoming a profitable business.