Wait Until Q3 Earnings Aftermath to Buy Fastly Stock

Up until three weeks ago, cloud computing company Fastly (NYSE:FSLY) had been a 2020 success story. The novel coronavirus pandemic has resulted in many people working from home, and schools are offering online learning. Between work, school, online shopping, gaming and staying in touch with social media, everyone is spending more time online. That’s good news for Fastly. The company specializes in edge computing, which speeds up content delivery. Up until two weeks ago, Fastly stock had been on fire, posting gains for the year of over 500% at its highest.

A magnifying glass zooms in on the Fastly (FSLY) website.

Source: Pavel Kapysh / Shutterstock.com

Fastly earned an “A” rating in Portfolio Grader. The company was growing rapidly, adding new customers at a record pace and topping analyst expectations on earnings and revenue. It had even signed the hottest social media platform as a client. However, since mid-October, Fastly stock has dropped nearly 45%. Does the dramatic reversal in fortune mean Fastly has lost its luster — or does it offer a buying opportunity?

Preliminary Q3 Guidance Sinks FSLY

Like virtually all tech sector stocks, FSLY was affected by the broad market selloff at the start of September. Fastly stock recovered faster than most, and in a matter of weeks had not only recovered its losses, but also returned to growth. On Oct. 13, it closed at $128.83, a new all-time high.

And then the company released preliminary third-quarter revenue results. While its third-quarter revenue guidance had originally been for between $73.5 million and $75.5 million, the company announced it was now expecting significantly less: $70 million to $71 million.

Why the expected shortfall? According to Fastly:

“Due to the impacts of the uncertain geopolitical environment, usage of Fastly’s platform by its previously disclosed largest customer did not meet expectations, resulting in a corresponding significant reduction in revenue from this customer. During the latter part of the third quarter, a few customers had lower usage than Fastly had estimated.”

That largest customer, by the way, is TikTok, the controversial Chinese video-sharing platform. That whole situation is complex and remains far from resolved, but Fastly has been collateral damage in the battle between TikTok and the U.S. government.

The company reassured investors that the “… fundamentals of Fastly’s business remain strong, as does demand for our platform.” However, the revised guidance spooked the market. Fastly stock immediately went into a tailspin, dropping 27% to close at $89.70 the next day. It’s been sliding ever since, losing a further 20% over the past two weeks. 

Bottom Line on Fastly Stock

Fastly’s actual third-quarter results will be released after the markets close on Oct. 28. I suspect that FSLY is going to drop further once that information is released — it dropped after Q2 results were announced, despite beating analyst expectations for both revenue and earnings. 

However, I would be watching for that drop as an opportunity to snap up Fastly stock at a bargain price. Remember, much of the concern right now is because of lower than predicted usage by a single customer. Take TikTok out of the equation, and the Fastly story is still a compelling one that points to long-term growth. 

Even at the lowered third-quarter guidance, that would still represent year-over-year revenue gain of over 40%. And in the second quarter, Fastly reported the largest increase of new customers in its history. That included a gain of seven new enterprise customers. That rapid pace of new customer additions is likely to slow as employers begin to bring staff back to the office. But if the company can hold onto a good chunk of those, that ongoing revenue plus ongoing new additions (albeit at a slower pace) will put Fastly in a good position. 

Long term, I see FSLY on the path to recovery and then growth once again.  

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.

Article printed from InvestorPlace Media, https://investorplace.com/2020/10/wait-until-q3-earnings-aftermath-to-buy-fastly-stock/.

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