The last four trading days coming into today have not been kind to Fastly (NYSE:FSLY). FSLY stock fell 18% from high to low and in spite of this investors should be happy.
It is hard to cry over a +345% year-to-date record. So what if it had a few red ticks? This dip is an opportunity to get long. They won’t ring a bell announcing it, but it is the right thing to do. It has support below and the bulls are still in charge of this market.
Yesterday’s market-wide action felt bearish as the VIX spiked 7%. Yet the S&P 500 was barely down and the NASDAQ was slightly green. Sellers have not yet packed a punch and held it this year.
The digital revolution went into hyper-gear because of pandemic. Now everyone on the planet is in panic mode trying to get online for work, shopping, and everything in between. The demand for Fastly services is exploding and that’s a runway to last for years. The cord cutters won and soon enough everyone will be streaming all media.
That’s where this company comes in. In my family we consume online videos on the daily for entertainment, work and as a project resource.
FSLY Stock Bulls Have the Right Idea
Shorting this kind of potential is lunacy at this stage. One would need to have a bearish view on the entire market. FSLY stock is not going to collapse alone just as it won’t rally alone either. Therefore, it will need the cooperation of the indices.
Therein lies some extrinsic risk. Stocks are near all-time highs and on shaky macroeconomic conditions. But the governments are pumping in trillions in free money to prop things up. Fastly will need this overall exuberance to continue to make this thesis work. If markets correct, this one will also fall.
For a while back in October it and the whole cohort suffered tremendous losses. Investors severely punished them for the smallest blemishes, in spite of strong earnings reports. Fastly management revised its guidance by 5%, but investors sold its stock down 30%. Proof of today’s thesis is that it found footing in a big way. Starting in November, the bulls mounted a 75% rally that just ended.
My contention today is that the buyers will step in again soon. If this happens, then they have the opportunity to draw the handle to a bullish chart pattern. The neckline/trigger would be at $108 per share. If FSLY stock goes above it, it will invite new buyers to target new all-time highs. This is not imminent but they can get there. I wrote about this very same opportunity on its last correction so rinse and repeat should continue to work.
Fastly Is Not a Broken Company
The recent correction was not due to anything wrong with the company. Sudden drops like this have more to do with wrong expectations than bad execution. My only concern comes from the outside factors.
The indices are setting records with deteriorating conditions. Although we have a vaccine, the virus is still accelerating. There is also the potential of a variant spread starting. Large economies like California and New York have reverted to lockdowns once more. Although I am seeing more business who are not complying, at least in Southern California where I live. Nevertheless, this is a concern and a dip in the indices will bring more pain in Fastly as well.
Fundamentally this company is not cheap. It still loses money and it has a 35x price-to-sales ratio. Owners of the stock have high expectations. Management gave them reason for this since they almost tripled their revenues from three years ago. Growth like this doesn’t come cheap. That’s why Wall Street gives it a pass on that front for now.
Technically it has already given back a lot of the froth so the easy bearish work is over. From here, sellers will need to find good reasons to inflict a lot more damage. Buyers lurk here and through $80 per share.
The Alternative Method of Profits Without a Rally
Using options investors can deploy bullish trades that don’t need a rally to win. For example I can sell the Feb. 5 FSLY $65 put and collect about $2 for it. As long as the stock stays above $65, then I retain my maximum gains.
If the unthinkable happens and price falls fast, I break even at $63 per share. That’s another 29% cushion from here. Compare this to someone who buys FSLY stock today at face value. They’d be already down that much when I merely break even.
These are uncertain times and Fastly is a momentum stock. Therefore by definition my conviction should be downgraded a few notches on this trade. Meaning I don’t take a full size position all at once.
I should leave room to manage the trade in case there is trouble. This is 2020 and we don’t know how 2021 is going to start.
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.
