When rising stars stumble they do it in a spectacular manner, and this is what just happened to Fastly (NYSE:FSLY). Up until two weeks ago FSLY stock was on a rocket ride to the moon. In September alone, it rallied 90% before falling off a cliff. The point of today’s write-up is to catch the falling knife. The stock fell 30% on the headline that its guidance by $3.5 million or 4.7%. The punishment doesn’t fit the crime.
This is definitely a momentum stock because it moves extremely fast in either directions. But even after this 45% correction from the all-time high, FSLY stock is still up 270% in 2020. This is still nine times better than the Nasdaq. So it’s hardly a sad situation that the investors are facing and more of a temporary setback.
Unlike most other momentum stocks that have just corrected, this one had a specific reason why. It’s not that it got overextended, but rather because of what management said.
FSLY Stock Punishment Was Too Harsh
What triggered the fall was that they announced disappointing news from ByteDance the parent of TikTok. Wall Street, as usual, overreacted! Investors feared the concept more so than the actual magnitude of the loss. They imagine it happening over and over again, thereby killing the business.
Most often with frothy stocks, traders don’t stop to think before they act. They sell first and then they revisit the potential later. We are in the age where machines do most of the trading and the algorithms said sell FSLY stock now.
This is where the human factor serves as well. The fear of falling causes mistakes, and those who can overcome it can capitalize on them. I expected a dip — in fact I wrote about the opportunity two weeks ago.
Today I reiterate my message from the prior write up that the bulls are in charge so it is another opportunity to buy. Even if this is not the bottom it is close enough. The $70-per-share zone has been a major pivot since June so it should be supportive. Even though it could still fall further, at these levels it’s worth adding some shares.
The Opportunity Still Lies Ahead
Long-term investors who believe in the stock can stay invested in it. Those who missed it two months ago can jump on this second chance.
Options investors have the opportunity to sell Dec $55 puts and collect $2 per contract. This gets them long immediately with another 25% buffer from current price. The break-even on that trade is $53 per share.
Alternatively to buying shares, cautious investors may want to invest in long-term dated call options. This locks in the price for them at a fraction of the overall risk. “Time” then becomes a factor, and the quicker the rally, the better. I prefer selling puts because then the profits come without a rally and with absolutely no money out of pocket.
Regardless of the method by which investors participate in a bullish bet on Fastly, this is a good opportunity. Nevertheless, we are in a period of heavy headline risk, therefore conviction must be humble. Investors should leave room for error. Taking full-size position all at once is reckless.
Valuation here is not reasonable, but that is the case with almost all young internet stocks. FSLY stock price-to-sales is over 31 which is high. For absolute perspective this is six time more expensive than Amazon (NASDAQ:AMZN) without the profits that Amazon has. But that alone is not a reason to short it — that shouldn’t even be part of the conversation yet. Young stocks like this usually get the benefit of the doubt until they show mediocrity. This one has not yet, management merely revised its a small amount. The reaction was overblown.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.