The worries about Fastly’s (NYSE:FSLY) revenue from TikTok are overdone. Meanwhile, Fastly continues to effectively innovate and looks poised to be a huge disruptor. In light of these points, long-term investors should not worry about the valuation of FSLY stock.
FSLY stock tumbled recently after the company reported its much better-than-expected Q2 results.
One big reason for the slide was the Street’s worries over the fate of Fastly’s revenue from TikTok. President Donald Trump recently signed an order banning the popular China-based app – which has been accused of spying – in the U.S. as of Sept. 20.
Concerns About TikTok Are Exaggerated
Spurring a great deal of fear and hand-wringing among analysts, Fastly on its Q2 earnings conference call reported that TikTok had accounted for 12% of its total revenue in the first half.
Oppenheimer downgraded FSLY stock to “perform” from “outperform,” labeling TikTok a “major risk” for the shares. The firm also cited valuation as a key reason for the downgrade. Oppenheimer said the TikTok deal was “far from certain” and warned that Microsoft (NASDAQ:MSFT) could use its own infrastructure, instead of Fastly’s.
But that scenario is unlikely because Microsoft’s ecosystem for developers, GitHub, acquired by Microsoft in 2018, utilizes Fastly. If Microsoft hasn’t bothered to switch GitHub to its own infrastructure, why would it run to do so with TikTok?
Further, if Microsoft doesn’t buy TikTok, the odds are extremely high another American company will. The app is extremely popular, and it’s apparently quite profitable. Further, a company could use the app to collect data about tens of millions of consumers around the world and promote its products.
Additionally, Fastly pointed out that it does business with TikTok outside of America and that it may be able to continue even if the app’s lights go out in the U.S. And finally, if Joe Biden becomes president in January 2021, he could very well rescind Trumps order.
All in all, I think the chances of Fastly failing to generate meaningful revenue from TikTok in 2021 are about 5%. The odds of the company failing to obtain significant revenue in Q4 of this year are somewhere between 10% and 15%.
Poised to Continue Its Disruption
In my previous column on FSLY stock, I discussed some of the company’s innovative technologies. Specifically, I noted that it “appears to have revolutionized content delivery networks, or CDNs, by making them easier for developers to utilize.”
It accomplished that partly by enabling them “to analyze more data than” competitors, the company says. Other websites raved about the ease of use, speed and superior monitoring capabilities of the company’s products. Moreover, I noted that “Spotify (NYSE:SPOT) indicated that Fastly offers ‘faster performance, access to metrics, and logging of delivery [of content], as well as “a system that … [is] easy … to maintain.’
Now the company is emphasizing a new product called Compute@Edge, as well as its security offerings. Described by Fastly as “real-time serverless architecture for high-performance applications,” Compute@Edge sounds quite revolutionary. According to Fastly, online retailers use it to put more data on the edge. This provides faster, higher quality updates and responses that are more often personalized. Fastly added that Compute@Edge is faster than competing solutions.
Fastly says that it invests “heavily” in security technologies. The company say its use of a single, unified network makes it easier for users to control and assess their systems. And it noted that Compute@Edge compartmentalizes “all requests and responses.” Such isolation enhances security by preventing hackers who penetrate one area of a system from accessing all of it.
Bottom Line on FSLY Stock
The digitalization of media, shopping and the entire economy is moving extremely rapidly and accelerating. Fastly is benefiting a great deal from that trend,. That’s why the company’s revenue soared 62% year-over-year in Q2.
Moreover, I continue to believe that the company’s offerings are superior to those of its competitors. As a result, I expect the company’s growth to continue to be exceptionally rapid, whatever happens with its relationship with TikTok.
After the recent decline of FSLY stock, the company’s forward price-sales ratio, based on analysts’ average 2021 sales estimate, is about 20 times. That sounds high, but the equivalent metrics for Shopify (NYSE:SHOP), Zoom Video (NASDAQ:ZM) and The Trade Desk (NASDAQ:TTD) are 36, 35, and 22, respectively. I think that Fastly’s growth and profitability outlooks are much stronger than all of those names. Shopify and The Trade Desk are facing some pretty tough competition. Zoom’s growth is poised to sink tremendously once the pandemic ends.
Long-term investors should buy some FSLY stock now and be prepared to buy more in the event of a market downturn in October and November. That’s when the pandemic could intensify for a short time before a vaccine is ready.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been Plug Power, solar stocks, and Snap. You can reach him on StockTwits at @larryramer. As of this writing, Larry Ramer owned shares of Fastly.