Shares of content delivery network (CDN) firm Fastly (FSLY) has suffered one of the most painful drawdowns amid this market sell-off. Indeed, the Fastly crash kicked off far sooner than most of the names that are now rolling over, thanks to a weak quarterly result.
Now down over 80% from its all-time high, just north of $127 per share, the misunderstood cloud service provider is starting to look modestly valued at around 8.5 times sales.
Despite the crash and far more enticing multiple, there are many challenges that Fastly needs to have answers to over the coming year. Further, the company is not yet profitable, meaning it’s directly in the crosshairs of the latest tech wreck that some may compare to the dot-com bubble bust of 2000. Just because Fastly stock has shed more than 80% of its value does not mean it can’t continue its free-fall en route to the single digits.
With the pandemic boom and bust now in the rear-view mirror, it’s hard to stay bearish on the company, as nothing but negativity is baked in going into the firm’s coming quarter. For now, I am neutral on FSLY stock.
At the same time, Fastly needs to prove itself to skeptical analysts, many of whom have been quick to lower the bar on their price targets after the fact. Earlier in the month, RBC slashed its price target to $30 from $50. That’s a whopping $20 cut.
Fastly: A Falling Knife That’s Yet to Hit the Floor
It’s been the perfect storm for Fastly. Thus far, knife catchers have been knicked by the fast-falling tech company that clocked in a brutal quarter last year that investors have still not forgiven.
While Fastly technically delivered mostly in line per-share earnings losses in its last four quarters, the biggest concern to investors was the growth slowdown. Why pay a double-digit price-to-sales (P/S) multiple for a company that can’t keep its growth sustained? Indeed, Fastly’s growth slowdown serves as a dire warning to investors who chase growth and are more than willing to pay any price to obtain it.
In the third quarter, the company clocked in a solid result that beat management’s guidance. With investors turning against unprofitable companies, though, the improvement isn’t much of a sustained needle mover anymore.
Undoubtedly, the perfect storm has evolved, and the company may have to keep impressing the Street if it’s to form any sort of bottom, as investors continue ridding their portfolio of tech stocks.
A great third quarter is something for dip-buyers to get behind. The real question is whether or not the latest results are just a positive outlier amid a negative trend. Though revenue was up 23% year-over-year, operating margins were not in a great spot. The retention rate improved, thanks in part to credits offered following the firm’s widely-publicized outage that failed to deliver on its 99.9% uptime guarantee.
Wall Street’s Take
Turning to Wall Street, FSLY stock comes in as a Hold. Out of eight analyst ratings, there has been one Buy, six Holds, and one Sell assigned in the past three months.
The average Fastly price target is $38, implying an upside potential of 55%. Analyst price targets range from a low of $25.00 per share to a high of $50.00 per share.
The Bottom Line on Fastly Stock
Fastly possesses a magnificent CDN technology that could allow it to re-accelerate its growth at some point down the road. The company does CDN far better job than most traditional providers. After surrendering nearly all of its pandemic gains, FSLY stock is an intriguing contrarian growth play that’s in the blast zone of the latest sell-off.
Although the market opportunity and pathway to expand upon margins could be sizeable, it’s tough to get behind the stock until further evidence of a turnaround is in. Of course, by then, investors would have to pay a much higher price tag for the name.
The CDN market is worth betting on, but the billion-dollar question remains: is Fastly the firm to bet on it, given the potential for rising competition over the next decade? I’m not so sure yet.
I’m a fan of Fastly’s service over most rivals in the space, but big outages do not bode well for the firm’s reputation. Should another occur, I’m not so sure customers will be nearly as forgiving, even with credits.
For now, expectations are now very low, making the odds of a needle-moving beat quite sizeable.
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