The past month has been a strange one for cloud computing services provider Fastly (NYSE:FSLY). Up until the start of August, FSLY stock was up 380% since the start of the year. But in August, things got weird. And despite a second-quarter earnings beat followed by the announcement of a strategic acquisition and a big analyst upgrade, FSLY stock took a beating.
At this point, shares are down about 30% in little over a month. So, what gives?
Here’s what happened to Fastly and why its terrible month makes FSLY stock a tempting target.
TikTok Drama Overshadows Earnings
On Aug. 5, Fastly reported Q2 earnings, and it was mostly good news for shareholders. Adjusted earnings per share of 2 cents beat Wall Street estimates of a 1-cent loss, and blew past Q2 2019’s loss of 16 cents per share. Additionally, revenue was up 62% year-over-year. The company’s operating loss of $14.44 million was up 23.6%, but overall it was a solid quarter.
The company raised its 2020 guidance, pointing out that the novel coronavirus pandemic has been good for business and the shifts being made to accommodate remote workers offer ongoing opportunity:
“As the global pandemic continues to accelerate the need for businesses to focus on digital transformation, the demand for a modern, fast, and secure edge platform like ours continues to increase.”
In turn, the market reaction was to send FSLY down — and hard. That said, the blame for that appears to lie with Chinese social media company TikTok. Yes, that TikTok.
In a post-earnings interview with Barron’s, Fastly’s CEO pegged TikTok as his company’s largest customer. In fact, TikTok accounted for 12% of Fastly’s revenue in the first half of 2020. Thus, with all the drama about a potential ban of the popular social media platform in the U.S., FSLY stock felt the heat.
Signal Sciences Acquisition and Edge Computing
On Aug. 27, Fastly made a big announcement. It has agreed to purchase Signal Sciences for $775 million in cash and stock. Fastly specializes in content delivery, and overall, it’s a content delivery network (CDN) that helps users to access digital content more quickly; Thus, the name. However, it has also expanded into security services and edge computing.
Collectively, the Signal Sciences acquisition will provide a significant boost to that edge computing aspect of its business. In fact, Fastly noted in its announcement:
“This new solution will integrate with our ComputeEdge platform, accelerating the adoption of edge computing, while simultaneously solving for modern security challenges.”
Remote work and remote learning have rapidly accelerated in adoption during the pandemic, and they’re showing signs of becoming permanent options. That said, this move toward decentralization means more emphasis on edge computing security.
Analyst Upgrade, Then Tech Stocks Get Hit
Following the news of its Signal Science acquisition, Credit Suisse analyst Brad Zelnick raised his price target for FSLY stock. Zelnick boosted his price target from $100 to $110, keeping an Outperform rating on Fastly shares.
Before the Aug. 27 developments could have much of an impact on FLSY, tech stocks suffered a meltdown. And with tech stocks seeing their biggest drop since March, Fastly wasn’t immune. At this point, shares are down 10% since the start of September.
Bottom Line on FSLY Stock
Overall, Fastly is a company that is in the right place at the right time. FSLY stock was flat after its 2019 IPO, but the pandemic suddenly made content delivery networks more important than ever. It’s no wonder shares exploded in value as businesses and schools rapidly adopted remote access.
Fastly’s acquisition to up its edge computing security chops is a great strategic move and should make it an even bigger player. And the fact that so many companies are looking to make remote access an option (or even permanent) for many employees once the pandemic is over bodes well for continued growth in its business.
This stock earns an ‘A’ Portfolio Grader rating. And with Credit Suisse looking for shares to hit $110, the current slide in FSLY is a real buying opportunity.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
Louis Navellier had an unconventional start, as a grad student who accidentally built a market-beating stock system — with returns rivaling even Warren Buffett. In his latest feat, Louis discovered the “Master Key” to profiting from the biggest tech revolution of this (or any) generation. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.