The novel coronavirus has triggered an explosion in the income of a whole segment of stocks. Fastly (NYSE:FSLY) is one of them and today we examine the opportunity that exists in FSLY stock from here.
The quarantine forced the entire world to expedite its migration to all things digital. Starting in March, we suddenly found ourselves needing to do everything online to avoid human contact whenever possible. Consequently, demand for anything that has to do with the cloud exploded, and Fastly is in the middle of it.
The stock is up 353% year-to-date, but this doesn’t mean that the rally is over. It just suffered a dip and the bulls are showing that they still like it and that they are prepared to defend it. This is not a cheap stock so it’s easy to think it deserves a correction.
The demand on its services ballooned and sales are up 50% from last year. This potential has room to run because the trend is not reversing anytime soon. The digitization process is only going to get more involved. Eventually FSLY stock fundamentals will catch up with its price.
FSLY Stock Deserves the Premium It Now Carries
Currently the FSLY stock price has 31 years worth of its sales built into it already. This sounds high but as we saw on Tuesday, Zoom Video (NASDAQ:ZM) spiked 40% in one day and it had a 120x price-to-sales. A high number is not necessarily a reason to short this stock, however.
The price action this week was encouraging because after a dip on Monday, the bulls stepped in with force. Fastly rallied 13% in mere hours and without a headline. Clearly the bears have their work cut out for them if they are to break this momentum mover.
The chart suggest that the buyers have been in complete control of it since April. Back then they broke out of $25 per share and rallied as much as 345%. It fell from grace around the earnings but not enough to change the fact that it is still setting higher-lows. Currently it’s close enough to the all-time highs that the bulls can mount another assault. If FSLY stock goes above $100 it could trigger another $10 to $15 breakout from there.
Beware of the Whole Equity Market Setting
My only concern with the rally in this stock comes from outside factors. The whole market is precariously perched and has been rallying out of proportion with the underlying fundamentals. We are still setting records at blinding speeds, even this morning with deteriorating economic conditions.
Last week 15 million Americans filed for unemployment. Moreover the U.S. GDP is shrinking in spite of trillions of dollars trying to prop up the economy. This is all to say that equity prices have gone beyond all expectations. While this is an incredible feat, it is also the current giant looming risk.
The U.S. is going into an election season so there’s the added unpredictability factor of politicians. The fact that they went on vacation before securing funds for the unemployed speaks volume. Politicians are wild bunch and they can definitely throw a wrench into the stock market machine.
Equities are acting as if Trump will win, but if he doesn’t there will be negative consequences. This is not a political statement, but I do know that Wall Street hates uncertainty. Having a new president would bring it for a few months. Investors are familiar with the status quo and any change in it will cause unease at least for a set period of time.
Trade Fastly With a Plan
The trading FSLY stock strategy is simple. Buy the breakout above $100 or by the dip closer to $80 per share. Meanwhile investors can also sell the $70 October put to generate income out of thin air. Doing this would eliminate the need for a rally to profit.
In fact, the stock can fall another 20% from current levels and not change the winning outcome. There is a cautionary technical risk that lies beneath $73 per share. If the bulls lose it, they risk falling another $20 from there. While this is not my scenario, it is one that exists especially if the market in general corrects.
Stock prices have been unpredictable, but the investor behavior has been consistently bullish so they are buying the dips. Expert consensus is that this is like 1999 and they are expecting a complete collapse shortly. I don’t completely disagree, but that alone is not yet a reason to short winning stocks like this one. It’s best to stick to the technical information from the charts like we did today so we have a plan rather than a speculative guess.
Nicolas Chahine is the managing director of SellSpreads.com. Join his live chat room for free here. As of this writing, he did not hold a position in any of the aforementioned securities.
