A cloud computing services provider with an emphasis on content delivery, Fastly (NYSE:FSLY) is one of the many technology-based benefactors of the novel coronavirus pandemic. While there’s always been a need for quick, efficient distribution of content across various platforms, this crisis and its associated disruption have boosted the case for FSLY stock.
If you needed more confirmation, management provided it with a stellar second-quarter earnings report. Heading into the print, covering analysts anticipated that Fastly would produce an earnings-per-share loss of a penny. Instead, EPS came in at a positive 2 cents.
Just as impressive was the company’s revenue haul. Individual estimates ranged between $70.9 million to $74.5 million, with the consensus resting on $71.4 million. However, Fastly blew this target out of the water with $74.7 million, exceeding the top end of the forecast spectrum. Best of all, management raised its 2020 guidance.
So, you’d expect FSLY stock to soar on the announcement. Yet shares gapped down badly the day after. What the heck is going on?
In a word, TikTok. One of the most popular social media apps — don’t ask me why — TikTok has found itself under fire from the Trump administration due to the platform being a possible national security risk. As a result, the president took out his Sharpie and issued an executive order which placed the app in a bind: find an American buyer by mid September or be banned in the U.S.
If such a ban occurs, it would have a material impact on FSLY stock. According to Fastly CEO Joshua Bixby, TikTok is the company’s single largest customer. In the first half of this year, the popular app accounted for 12% of total revenue.
FSLY Stock is a Double-edged Sword
To be fair, it’s not all doom and gloom. As you probably know, Microsoft (NASDAQ:MSFT) is very interested in acquiring TikTok. And in many ways, the move makes sense, giving Microsoft a younger edge that rival Apple (NASDAQ:AAPL) enjoys naturally.
Also, as far as FSLY stock is concerned, Bixby notes that Fastly already does business with Microsoft. If the software and tech giant secures a deal, FSLY will be off to the races.
But that’s also a big if. Plus, there’s another variable at play — talk could break down, sending Fastly crashing. That uncertainty is reflected in an unstable trading pattern in FSLY stock.
According to the godfather of technical analysis, John J. Murphy, what we could be seeing is a broadening top formation. From Murphy’s book, Technical Analysis of the Financial Markets, a broadening top is a type of expanding triangle that usually occurs at market tops. “It shows three successively higher peaks and two declining troughs. The violation of the second trough completes the pattern.”
Moreover, this type of technical formation “represents a market that is out of control and unusually emotional. Because this pattern also represents an unusual amount of public participation, it most often occurs at major market tops. The expanding pattern, therefore, is usually a bearish formation.”
Click to Enlarge
For your benefit, I’ve drawn a representation of a broadening top. Now, compare that to the chart of FSLY stock. If my interpretation is correct, shares will move higher in the near term (the fifth price action event on my chart). But a breakdown will occur (number six), followed by a much more comprehensive bearish fallout (number seven and eight).
However, this isn’t the only interpretation available.
Fastly Could Make a Great Trade
Recently, InvestorPlace contributor Tyler Craig suggested that Fastly stock could represent an opportunity in the making. Specifically, he views FSLY’s price action as testing the $75 support level. If this floor holds, shares could move decisively higher.
Interestingly, we’re both on the same page that there’s a solid chance that FSLY’s next move is higher. But whether that bullishness sticks is a different story.
Frankly, I’m just not sure where FSLY stock will end up. Although I personally rely on John J. Murphy’s infinite well of wisdom, Craig is a professional technician. So, readers may wish to defer to Tyler in this coin toss.
But another way to approach Fastly stock is to trade it. Basically, we don’t know where FSLY will end up because it depends on an outside factor (i.e., the TikTok deal). However, we’re confident that shares will move somewhere.
Given this likelihood, traders may wish to consider options strategies, such as strangles or straddles to profit off volatility rather than directional trajectory.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.
