InvestorPlace’s Louis Navellier recently suggested investors wait until after Fastly (NYSE:FSLY) reported its third-quarter results to buy Fastly stock.
His rationale was simple.
Fastly Stock Is Likely to Fall Some More
The company’s stock had been on a bit of a downward spiral since announcing preliminary Q3 2020 results in mid-October. To be clear, at its one-month low of $63.51 on Oct. 30, from its 52-week and all-time high of $136.50 on Oct. 13, the day before releasing the bad news about its largest customer (TikTok), it’s stock lost 53% of its value.
It’s regained a few dollars since the calendar turned to November but not nearly enough to soothe the battered egos of those who bought FSLY before it released preliminary earnings.
To lose 53% of your investment in the span of three weeks is going to bruise anyone’s ego, even billionaire hedge-fund investors.
Anyway, back to my colleague’s comments about Fastly and Q3 earnings.
“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,” Navellier wrote.
“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.”
I couldn’t agree more.
From where I sit, the glass is half full. If you’re brave enough to forget about the Tik Tok effect, the tremendous dip in its stock since Oct. 14 is a Grade A buy-on-the-dip investment opportunity.
Here’s why I think so.
The Overall Business Remains Strong
The first time I covered Fastly stock was at the end of July. At the time, there were some serious concerns about its stretched valuation, trading at more than 35 times sales. Thanks to its October freefall, it’s now trading around 27 times sales, a 23% reduction in its price-to-sales multiple.
To my untrained tech eye, Fastly’s edge cloud platform seemed like a solution to a problem for companies operating massive digital websites with lots of internet traffic
“Overall, looking at Fastly’s three most recent fiscal years, you’ll see that the company’s chipped away at its operating expense ratio [defined as operating expenses divided by revenue] — 83.2% in 2017 to 79.2% in 2019 — at a time when the company’s in serious growth mode,” I wrote on July 31.
“To me, this demonstrates management has a keen eye on spending, something many tech firms are unable, or unwilling, to do. And that, more than anything, suggests Fastly’s future is a bright one.”
I concluded that long-term buyers should be okay buying at current prices but should hold back some cash if it wasn’t done falling.
It wasn’t. It fell to about $75 in mid-August before going on its next leg up to $136.
A little more than a month after my first Fastly article, I suggested that given Fastly’s volatile share price, investors would likely be able to buy it in the $70s at some point in the final four months of the year.
Especially if it reported less-than-stellar earnings in the third quarter.
Well, the company’s results were fine — 42% revenue growth, gross margin gains, customer additions, and free cash flow of $13.4 million, up from -$17.0 million a year earlier — and yet its shares still fell due to a nine-cent non-GAAP loss, five cents worse than analyst expectations.
Forget the miss.
The Bottom Line
The most important aspect of its Q3 2020 report is that it delivered a 12-month trailing free cash flow of -$26.2 million, a 48% improvement over the 12-month trailing free cash flow from a year earlier. Furthermore, its free cash flow margin during the third quarter was 19.0%. I’d expect that to keep moving higher in the quarters to come.
I definitely see a business that’s doing a lot of things right. What happens with TikTok, to a large extent, is out of its control. A majority of its business is doing just fine.
As I said in September, if Fastly stock falls into the $70s, investors should back up the truck.
As I write this, it’s up 5% on the day and trading a few cents over $68. You better find the keys.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.