In early August, cloud company Fastly (NYSE:FSLY) soared close to the $120 level, a new high, ahead of its earnings report. When it posted results on Aug. 5 after the market closed, the stock lost nearly $40 in value. Relentless selling volume sent FSLY stock down to its 50-day simple moving average at around $77.00.
After markets decided the company traded at highly unfavorable valuations, chances are very low that the stock will recover any time soon.
In the second quarter, Fastly posted non-GAAP earnings per share of 2 cents. It lost 14 cents on a GAAP EPS basis. The company’s revenue grew by 62.3% year-on-year to $74.66 million.
Customers grew at the largest in the quarter since its IPO. No matter what customized metric Fastly posted, it was not enough to impress investors. For example, Dollar-Based Net Expansion Rate (DBNER) was 137%, up 133% from Q1/2020. And while net retention rate of 138% is up 130% sequentially, Fastly still lost money in the quarter.
CEO Joshua Bixby revealed in an interview with Barron’s that TikTok accounted for 12% of its revenue in the first half of 2020. The near implosion in the valuation in TikTok, due to the U.S. order for its parent, ByteDance, to sell, may hurt Fastly.
Given TikTok’s security risks, countries may decide instead to ban the app. If usage falls off a cliff, Fastly could lose up to 12% of its revenue without warning.
A Closer Look at FSLY Stock
Growth investors may ignore the growing risks from TikTok and the quarterly loss. If the GAAP gross margin of 60.2% in Q2 increases in the future, Fastly will post profits very soon.
The company’s platform is instrumental in supporting tens of thousands of websites. Customer needs are evolving because of the ongoing pandemic. So, the demand for a secure, scalable network will only continue growing.
Fastly is investing in its network and offerings to sustain its appeal to customers. For example, it is investing in Compute@Edge and security. As a mission-critical service, customers are unlikely to cut their spending on the platform.
And as Fastly’s customer count grows, they will buy more critical features. Easy access to tools, the Fastly Developer Hub, and Fastly Flow Control are just a few features the company offers to customers.
The Bottom Line on FSLY Stock
Fastly shareholders should brace for a revised outlook, should management expect TikTok revenue falling. In its Q2 letter (page 13), Fastly raised its guidance for the full year.
It expects total revenue of $290 – $300 million in 2020. It will lose between one and six cents per share (non-GAAP). In the third quarter, total revenue will be between $73.5 million and $75.5 million.
Five analysts rate Fastly stock as a” buy,” three rate it a “hold,” and two as a “sell” (per Tipranks). Conversely, in a 5-year discounted cash flow revenue exit model, assume the following metrics:
| Metrics | Range | Conclusion |
| Discount Rate | 11.0% – 9.0% | 9.50% |
| Terminal Revenue Multiple | 15.5x – 16.5x | 16.0x |
| Fair Value | $72.30 – $83.02 | $79 |
Using the above figures, the fair value is $79.00. Similarly, Fastly shares have a low value, quality, and sentiment score:
Investors should wait for markets to discount the uncertainties ahead for Fastly before betting on a temporary bounce that may never come.
Your Takeaway
Fastly rewarded early investors with an incredible run-up. Any rational investor who sold at or near the peak came out ahead. But greedy investors who felt they missed out may have bought the stock on a dip.
If they did so, they ended up paying top prices and will have to sit on paper losses for a long while. Until Fastly affirms no revenue loss from TikTok and raises its guidance, investors should avoid this stock for now.
Disclosure: As of this writing, the author did not hold a position in any of the aforementioned securities.
