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Earnings

Is Fastly’s share price a bargain ahead of earnings?

Fastly’s [FSLY] share price is the dictionary definition of volatility right now. This month has seen both a recovery in the stock and a steep selloff. Between 1 October and 13 October Fastly’s share price accelerated over 40%. Then, on 15 October, it fell 31% in under 60 seconds as the edge-computing company dramatically lowered Q3 guidance.

“Due to the impacts of the uncertain geopolitical environment, usage of Fastly’s platform by its previously disclosed largest customer did not meet expectations, resulting in a corresponding significant reduction in revenue from this customer,” Fastly said in a statement.

 

 

What Fastly is now expecting in Q3

That largest customer is ByteDance’s TikTok. The Chinese social media site accounts for 12% of Fastly’s revenue but in Q3 it, and other customers, have reduced the amount of traffic they send to the cloud computing service provider. This has left Fastly’s share price struggling to keep up.

Fastly had been guiding for between $73.5m and $75.5m in total revenue. Now it is guiding for $70m to $71m. Fastly also pulled its guidance of an adjusted loss of $0.01 a share. This would have been a marked improvement on the $0.09 loss per share in the same quarter last year.

Wall Street was expecting Fastly to post $73.57m in revenue for the third quarter, up 47.7% from the $49.8m seen in the same period last year. Earnings per share were expected to break even. In light of Thursday's turmoil, these estimates might change over the coming days.

Q3 earnings are now a must watch for investors. Already, Fastly has said it will issue new full-year guidance. How much lower it revises guidance will determine how far Fastly's share price will move post-earnings.

 

Why is Fastly's share price so volatile?

Between 2 January and 4 August, Fastly's share price had gained over 540%. Earnings had been huge, revenue was growing and more customers were signing up, fuelling investor demand for the stock.

 

540%

Fastly's share price YTD gains to 4 August 2020

 

 

That all changed in second quarter earnings when Fastly announced that business from TikTok represented a substantial chunk of revenue. The timing couldn’t have been worse, coinciding with President Trump's threat to ban the social media company in the US on national security grounds. This threat sent Fastly’s share price plummeting from a year-high of $116.28 on 4 August to close at $74.96 on 11 August. 

Since that low, the stock oscillated between $75 and $93 as tech companies Microsoft [MSFT] and Oracle [ORCL] scrambled to acquire TikTok. 

 

Fastly’s share price continues to fall

Fastly’s share price losses were compounded on Friday when Piper Sandler analyst James Fish lowered his rating from Underweight to Neutral and lowered his price target on Fastly from $84 to $65 — a 12.2% downside on the current share price. 

Fish thinks that reduced traffic from TikTok will continue to be an issue and predicts reduced usage from Amazon [AMZN], saying that “the risks are not appropriately reflected in the stock at these levels.”

 

“The risks are not appropriately reflected in the stock at these levels” - James Fish, VP and senior research analyst at Piper Sandler

 

 

Time to buy Fastly’s share price dip?

Investors now have to ask themselves whether last week’s losses mean that the stock has hit rock bottom. The stock is trading at a 35x price to earnings ratio, which is arguably well ahead of the fundamentals. Fastly’s share price tanking could represent a correction with the stock now approaching bargain levels. It is still a growing company and Q3 should see a huge jump in revenue, even if it's not as white-hot as previously forecast.  

“While our preliminary third quarter results reflect the challenges of a usage-based model, we believe the fundamentals of Fastly’s business remain strong, as does demand for our platform,” said Fastly CEO Joshua Bixby. 

For investors looking for a tech growth stock, now could be the time to buy. Among the analysts tracking the stock on Yahoo Finance, Fastly has a $95.50 price target. Hitting this would see a 29% upside on the current share price (as of 26 October’s close).

 

Market Cap$8.258bn
EPS (TTM)-0.55
Operating Margin (TTM)-21.36%
Quarterly Revenue Growth (YoY)61.70%

Fastly's share price vitals, Yahoo Finance, 27 October 2020

 

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