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Why Investors Should Accumulate Fastly Stock From Here

After its incredible breakout in June when it doubled, Fastly (NYSE:FSLY) stock is still attracting buyers.

A magnifying glass zooms in on the Fastly (FSLY) website.
Source: Pavel Kapysh / Shutterstock.com

The rush again to work from home stocks is lifting Fastly’s already stretched valuations. Yet the pandemic is not going away. If anything, the upcoming flu season is a breeding ground for the coronavirus.

Companies like Apple (NASDAQ:AAPL) liked staff productivity from remote work. By seeing permanent changes that will lift this work lifestyle, companies like Zoom Communications (NASDAQ:ZM) and Fastly stand to benefit.

Bears Pile On FSLY Stock

Bears built a nearly 10% short float on Fastly stock. The bearish bet will pay off if one of two things happens. First, if market selling continues in the weeks ahead in the technology sector, then investors may sell shares of Fastly. Second, if biotechnology companies get approval and distribute a coronavirus vaccine at mass scale in the weeks ahead, investors will sell Fastly shares.

In its shareholder letter, Fastly posted full-year 2020 revenue guidance of $290-$300 million. It expects to lose between 1 cent and 6 cents per share. In the third quarter, it expects to post earnings per share ranging from -1 cent to 1 cent. That minuscule earnings will scare cautious investors from investing in this firm.

Near-Term Opportunity

TikTok’s deal with Oracle (NYSE:ORCL) is a near-term opportunity for Fastly investors. Tiktok is one of Fastly’s biggest customers. Fastly’s CEO, Joshua Bixby, said that TikTok accounted for 12% of its H1/2020 revenue. So, if TikTok continues to operate in the U.S., it may keep growing its user base, demand more bandwidth, and increase Fastly’s revenues.

On Aug. 27, Fastly announced that it would acquire Signal Sciences for around $775 million in cash and stock. Signal Sciences has a strong developer-first web application. It also has an API protection solution that strengthens Fastly’s security offering. According to the press release, “With Signal Sciences’ technology, Fastly’s enhanced web application and API protection solution will deliver increased agility, visibility, and protection as more code and applications move to the edge.”

Alternative Investments

Besides investing in Fastly, Cloudflare (NYSE:NET) may suit growth investors, too. The company’s EPS will grow 23.5% next year, compared to Fastly’s 30% EPS growth over the next five years. Fastly’s Signal Sciences acquisition confirms that it is behind Cloudflare on such offerings. Now, it must spend $775 million to catch up, hurting current investors.

ZScaler (NASDAQ:ZS) is another alternative to Fastly. The company has an impressive customer list that includes the Federal Communications Commission, along with numerous mega-cap companies. Cloudflare’s customers include 9GAG and Reddit. Still, Fastly has customers that include Pantheon, Financial Times, Buzzfeed and Kayak.

On Wall Street, 11 analysts who rank FSLY stock have an average price target of around $92 (per Tipranks). In a five-year discounted cash flow revenue exit model, the stock is worth $96. Assume the following:

Metrics Range Conclusion
Discount Rate 11% – 9% 10%
Terminal Revenue Multiple 17.6x – 18.6x 18.1x
Fair Value $89.55 – $101.99 $95.59
Model courtesy of finbox

In the above model, assume a high discount rate to account for the increasing uncertainties ahead. Set a generous terminal revenue multiple to reflect the strong business growth ahead.

Your Takeaway

The increasing pace of the stay at home trend in the months ahead combined with TikTok not shutting down in the U.S. are positive catalysts for Fastly shares. The stock trades at rich valuations but so do other content delivery network firms.

Demand for next-generation edge technology will only increase. Users will demand reliable, fast, and secure services. Fastly is one of many firms offering that solution.

As its market grows and the company achieves profitability as early as next year, expect investors to accumulate shares.

Disclosure: On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Article printed from InvestorPlace Media, https://investorplace.com/2020/10/why-investors-should-accumulate-fastly-fsly-stock-from-here/.

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