Fastly (NASDAQ:FSLY) has taken the Street by storm. Shares of the San Francisco-based content delivery network (CDN) company have exploded this year, rising from $20 to $85. And the crazy thing is, all those gains for FSLY stock have come in the past quarter.
The 324% rise even outpaced Tesla (NASDAQ:TSLA). Caution is warranted after such a red-hot run, but if resistance gives way, I think FSLY stock could ramp into next week’s earnings.
The Fundamentals are Heating Up
Before May, Fastly was an uninteresting, stuck-in-the-mud stock. It had a string of quarterly losses and zero momentum on the price front, particularly when compared to the epic performance of the Nasdaq and other tech stocks. To be fair, the trend of its losses was improving. The past four quarters saw losses of 16 cents, 13 cents, 10 cents, and 6 cents.
May’s earnings report was the tipping point. Investors went wild after the numbers revealed impressive revenue growth. Fastly has done a fantastic job capitalizing on the increased internet traffic by shut-in consumers during the pandemic. For a more detailed take on the fundamentals driving FSLY stock’s parabolic ascent, check out Ian Bezek’s insightful take here.
There’s no doubt the stock has set an unsustainable pace. Skeptics will rightly argue the price of Fastly is far outpacing the underlying fundamentals. Years of growth have been baked in during this quarter’s parabolic ascent. To butcher a Top Gun quote, Fastly’s price is writing checks its fundamentals can’t cash. Not yet, at least.
With the stock now trading at sky-high valuation levels, there is elevated risk heading into the August 5 earnings announcement. Fastly was selling for $23 ahead of last quarter’s report. Now it’s $85. Will the growth justify such a tremendous price increase? I wouldn’t stick around to find out. Taking partial profits or protecting your gains by purchasing put spreads seems wise.
FSLY Stock Offers an Easy Breakout Trade
Though the stock has lost some steam in recent weeks, the overall trend remains constructive. Over the past eight trading sessions, Fastly shares have been wrestling with, and mostly losing to, the 20-day moving average. On the bright side, it’s creating an easy setup to trade if you think bulls jam prices higher ahead of next month’s report.
Resistance has cropped up at $87.70. If it holds, I won’t touch the stock. But if we break above it, there’s room to run to $100. That gives us approximately $12 of upside.
Because there are only two weeks until earnings, this is going to be a short-term trade. I prefer using stock over options to avoid any weird movements in implied volatility ahead of earnings.
For a stop loss, we can use yesterday’s low. Falling below it would invalidate the breakout as well as pull Fastly back to the south side of its 20-day moving average. It’s a bearish enough signal to justify exiting, mainly because there won’t be much time for the stock to recover before the report.
The Trade: Buy FSLY above $87.70 with a stop below $82.
If your target is $100, then the risk is about $6 versus $12 of potential reward.
Tyler Craig is a member of the Chartered Market Technician’s Association and holds the CMT designation. His entire adult life has been dedicated to helping individuals learn how to trade as an elite instructor and personal mentor. To join his team and the best trading community on the planet, click here. At the time of this writing, Tyler didn’t hold positions in any of the aforementioned securities.