Fastly Could Sink in the Near-Term
Although Fastly has become a crucial tool in a socially-distanced world, FSLY stock is likely to stay under pressure in the coming weeks
In 2020, a number of tech stocks like Fastly (NYSE:FSLY), an online content delivery network (CDN), have reached all-time highs. In 2020, FSLY stock is up an eye-popping 305%, hovering around $82.
A recent study by Yihao Jia of Tsinghua University, China and Aleksandar Kuzmanovic of Northwestern University states that, “To improve the quality of service and reliability, Content Distribution Networks (CDNs) distribute online content closer to end-users by deploying hundreds of thousands of servers worldwide.”
Their research has centered around “five CDNs [which] … attempt to improve web and streaming performance by delivering content to end users from multiple, geographically distributed servers typically located at the edge of the network.”
Last week, markets gave up some of their recent gains, making many investors nervous. Today we’ll take a close look at Fastly to see if the company should be part of long-term portfolios. Investors should consider buying FSLY stock if it falls to $75 or less.
Edge Computing And Fastly’s Q2 Results
Fastly, which had its IPO in 2019, is a leading developer of “edge computing,” a concept that is quickly proliferating. The technology helps decrease the need for long-distance communications between companies and a central server.
Researchers highlight that edge computing “brings the service and utilities of cloud computing closer to the end user and is characterized by fast processing and quick application response time… These features make Edge computing suitable for different future applications like industrial automation, virtual reality, real-time traffic monitoring, smart home, smart sea monitoring and data analytics.”
In early August, Fastly announced its Q2 results. Its revenue soared a robust 62% year-over-year to $75 million. Fastly’s earnings per share was 2 cents, up from a loss of 16 cents per share a year earlier. The company’s net loss came in at $14.46 million, versus a net loss of $15.59 million a year earlier.
Fastly CEO Joshua Bixby said, “We achieved strong top-line revenue growth, won new customers, expanded enterprise spend, delivered operating leverage, and bolstered our balance sheet.”
Fastly has an impressive list of customers, including Cloudera (NYSE:CLDR) Shopify (NYSE:SHOP), Spotify (NYSE:SPOT), and Wayfair (NYSE:W). Its customer count went up to 1,951 in Q2 from 1,837 in Q1, marking the largest increase in its customer base since it went public.
The average amount spent by its enterprise customers came in at around $716,000, compared to $642,000 in Q1. Before the release of Fastly’s Q2 results on Aug. 5, the shares hit an all-time high of $117.79. In the past month, it is up around 3%.
What Could Derail FSLY Stock in the Short-Term?
Over the past year, Fastly’s stock has jumped 190%, far outpacing the shares of other CDN providers, including Akamai Technologies (NASDAQ:AKAM), Cloudflare (NYSE:NET), and Limelight Networks (NASDAQ:LLNW).
As a result, Fastly’s valuation metrics are high. Its P/S and P/B ratios stand at 6.8 and 7.4, respectively. By comparison, the numbers for AKAM stock are 5 and 3.8, and the respective numbers for LLNW stock are 2.35 and 2.9.
InvestorPlace columnist Will Ashworth has written about Fastly’s stretched valuation levels and concluded, “You might be able to buy FSLY stock for a discount before year’s end.” I agree with him.
The shares’ recent price action suggest many investors do, too. Along with the increased volatility in broader markets, profit-taking hit Fastly’s shares last week.
There may be further selling pressure on the name in the coming weeks, pushing the shares toward the $75 level. That would provide long-term investors with a better entry point.
Finally, it’s important to note that the level of usage of CDNs by clients is the primary determination of Fastly’s revenue. As a result, the company’s revenue is dependent on the extent to which its clients’ sites are visited.
The Bottom Line on FSLY Stock
Fastly increases the speeds of websites and apps. It has been one of the market’s best-performing CDN companies this year. However, FSLY stock may retreat in the coming weeks.
In the wake of the decline of the shares last week, Fastly’s technical picture is not looking as strong as it did several weeks ago. High expectations amid the current volatile market conditions are translating into large swings for the stock price.
Long-term investors with a two- to three-year horizon may consider buying FSLY stock on weakness.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article.
The author has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. She also publishes educational articles on long-term investing.