As an edge computing services provider, Fastly (NYSE:FSLY) has dramatically seen its profile rise in 2020. With the novel coronavirus forcing radical changes to our world, never has cloud computing and data “accelerants” been more important. However, the longer-term trajectory for FSLY stock rests upon a familiar figure: leading U.S. health expert and White House coronavirus taskforce member Dr. Anthony Fauci.
Before I get into it, let’s back up. Over the last several weeks, the debate about where FSLY stock centered on social media platform TikTok. With the popular app accounting for a significant chunk of Fastly’s revenue, it appeared that its shares were suddenly held hostage to a geopolitical crisis. As you know, President Trump threatened to ban TikTok in the U.S.
Up until that point, though, FSLY stock was one of the biggest winners of the Covid-19 pandemic. As companies recommended, then forced their employees to work from home, data servers were deluged with requests. In addition, streaming firms like Netflix (NASDAQ:NFLX) or Disney (NYSE:DIS) saw increased demand for their services, heaping on the pressure to data centers.
Indeed, streaming demand represented a double whammy for our collective data server requests. First, there was the demand itself. Second, many American households cut the cord due to onerous cable bills. Plus, without live sports and events, cable TV providers lost substantial relevance. Well, the demand that would have been serviced by cable now had to be serviced by internet providers.
Sure, that’s a “good” problem to have if you’re a streaming company. However, if consumers don’t get their content right quick, they’ll go back to cable. That’s where content delivery network providers like Fastly comes in, bringing content closer to the edge of the network so that it can be downloaded quicker and more reliably by the end user.
So, what does this have to do with Dr. Fauci? If you think about it, pretty much everything.
FSLY Stock Hinges on a Second Wave
When you consider some of the traditional metrics used to gauge the fundamentals of a tradable security, FSLY stock seems awfully overvalued. According to GuruFocus.com, shares have a price-to-book ratio of 18.5 and a price-to-sales ratio of over 37. Both these metrics are well above Fastly’s historical averages.
Of course, the counterargument is that the paradigm has changed entirely for FSLY stock. I agree. Due to the coronavirus, demand for Fastly’s edge computing services has increased exponentially. But it also raises the question of whether FSLY’s bullishness over the last few months is dependent on the pandemic.
From the beginning of March to Oct. 1, FSLY stock shares a 78.5% correlation coefficient with new daily Covid-19 cases, as complied by the Centers for Disease Control and Prevention. In other words, as Covid cases increase, so too does the market value of Fastly and vice versa. And that’s why I say that FSLY’s trajectory depends on Dr. Fauci.
More specifically, how much do you trust other Americans to listen to the good doctor? From watching the news, there’s at least a sizable segment of the U.S. population that wants nothing to do with Fauci and CDC recommendations about face masks and social distancing. If this segment grows louder and more influential, we could see a substantial second wave.
In that scenario, the math indicates that you should buy FSLY stock. But what if the opposite happened?
Remember that a few months ago, Dr. Fauci reminded us that a second wave was not an inevitability. If we approached the crisis in a productive manner, we could flatten the curve, getting back to normal quicker. In that scenario, you probably shouldn’t buy FSLY stock because it’s overheated relative to the updated fundamentals.
A Tough Nut to Crack
In August, I mentioned that Microsoft (NASDAQ:MSFT) expressed interest in buying TikTok. If that were to happen, it would be a huge relief to Fastly stakeholders. But because of the uncertainty of whether such a proposal would go through, FSLY charted an unstable bearish pattern.
For now, Fastly stock is beating the negative implications of technically bearish signals that had flashed warnings. As you can see from the chart above, FSLY started trending upward in late September as Covid-19 cases also increased. Again, this dynamic demonstrates how Fastly is seemingly dependent on people getting sick.
Because of the number of crazed anti-maskers out there, it would appear, then, that FSLY is in “safe” hands. However, I believe President Trump contracting Covid-19 may change this narrative. As you know, Trump has millions of supporters that absolutely love him. When the President didn’t mask up, his loyal supporters also declined.
Further, Trump has downplayed the severity of the coronavirus. And because he never got sick, his supporters enjoyed plausible deniability. But now that he is infected, that deniability has gone out the window. And that might translate to some of his supporters taking mitigation efforts seriously.
But will that be enough to crater Covid-19 and avoid the second wave? That would be great for the country but not so great for Fastly’s pricey premium. Because of the uncertainty, I must go back to my original idea. FSLY stock is best engaged as an options trade on volatility. Unfortunately, its directional trajectory is still not clear.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.