If there was any financial benefit from this quarantine, then the cloud companies reaped almost all of it. This continues as yesterday Amazon (NASDAQ:AMZN), Shopify (NASDAQ:SHOP), and Zoom (NASDAQ:ZM) rallied over 8% for no specific reason. Fastly (NYSE:FSLY) is one of the Covid-19 cohort, and the FSLY stock price action is proof of how a catastrophe on Main Street can translate into a superb opportunity on Wall Street.
The stock rallied over 300% since the company reported earnings in May. This was an emphatic move because it happened in two tranches.
The first rally burst was 100%, then the bulls really gathered momentum and doubled that effort. It has given up quite a bit of the progress, but a 25% drop from an all-time high is not only normal, but healthy.
Buy the Dip in FSLY Stock
In this case, FSLY stock has retreated back into the first set of support zones and is finding footing there. As long as it stays above $60 per share, then the bulls are completely in charge. This is a perfect example of when it is appropriate to buy the dip even in the face of macro risk.
The global quarantine taught businesses the value of being online and quickly, so demand on Fastly services are going to only grow from here. As long as management continues to execute on its plans the way it has been, success is almost but a guarantee.
They say there are no sure things on Wall Street and that may be true, but short of a complete strategic disaster, this stock makes good sense for a long term buy-and-hold thesis. All businesses that are not there already are rushing to get on “the cloud” and the services from Fastly help with the process. Companies like Amazon made the cloud happen, while others like them are bridging the gap between it and its users.
This Is Not a Cheap Stock but It’s Worth It
Fundamentally, this is not a cheap stock. “Cheap” is almost impossible to achieve with a company growing this fast. Young companies have to spend money to grow, so profitability is a secondary concern for a while. The stock price is currently 34 times its total yearly sales, so there is a definitely a premium there. However, investors are willing to pay it for as long as they deem the growth they get in return is appropriate.
Sentiment on Wall Street still remains very bullish especially for tech stocks like this. They fall out of favor every once in awhile like last week for example, but spring back from it in a jiffy. Monday, the Nasdaq rallied almost 3% so investors bought the mini tech correction back with force.
This makes sense because there is no getting around the fact that the world is headed for 100% digitization in the next few years. The global lock-down put that process into high gear everywhere.
People who have never used the web were forced to do so during the quarantine. The majority of them will continue using it on an ongoing basis because it just makes sense. Progress most often is hard to unwind, so demand on high-tech products and services will remain high. This is likely to increase exponentially for at least a decade. Even though Fastly has a ton of competition, there will be enough room for most of them to prosper.
It Is Up to Management to Execute Well
This team has the vote of confidence from investors so far. Meanwhile, if Fastly stock falls below $74 per share, it could invite sellers for another $7 drop from there. This is not my forecast but even if this happens it would be part of normal price action on charts. The bears will try to retest every pivot point that they fought over on the way up. Conversely, the bulls will have an advantage at every one of those points.
If long the stock, investors can be confident through the short-term gyrations. If looking for an entry point, every significant dip like this offers an opportunity to get long the stock. Since stock markets are near all-time highs it makes sense to break up the entry into several tranches. This leaves room to manage risk if things deteriorate this fall on Wall Street.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities.
