Fastly (NYSE:FSLY) has been one of the most volatile stocks of 2020. Investors who bought the stock on Jan. 2 are sitting on a 275% gain. However, in mid-October FSLY stock was posting a gain of 499%.
So what happened? There was some selling on the news. Fastly’s largest customer, Tik Tok, stopped buying the company’s products.
There are some indications that this may only be a temporary roadblock, but the stock tumbled 27% in one day. That’s not the kind of thing investors like to hear.
Nonetheless, there seems to be a lot of bullish sentiment for FSLY stock. And for these committed bulls, the dip in the company’s stock is making this a great time to buy.
I’m not that convinced. In a past article, I described Fastly as having a different, albeit not necessarily better, mousetrap as it relates to its content delivery networks (CDNs). However the company does not have a moat. In fact, one of the company’s largest competitors (and also a partner) is Microsoft (NASDAQ:MSFT).
A Distinction Without a Difference
A recent peer insight study by Gartner shows that Fastly and Microsoft both receive high marks from their customers. In fact, both Fastly (88%) and Microsoft (91%) received high marks in the all-important “Willing to Recommend” category.
However this is where the story comes off the rails for me a bit. Fastly offers customers a more customizable experience, and based on a comment made in the Gartner survey, customers understand that. But it may not be enough to keep them from buying the Microsoft Azure product.
And when you look at the size of the companies of the reviewers, it’s very obvious that Microsoft and Fastly are competing for the same customers. This isn’t likely to change.
The Pandemic Won’t Last Forever
That’s more than wishful thinking. For better or worse, there will be vaccine distributed to actual individuals by the end of this year.
It doesn’t appear that vaccinations will be available to an extent that will allow businesses to host employees once again, and questions remain as to if employees will want to return to the office.
To be intellectually honest, it remains to be seen if the vaccine(s) will maintain their 90%+ efficacy rates in a mass inoculation scenario. But it does seem likely that this second wave of mitigation efforts will not result in the same boost in revenue as the first wave did.
Is FSLY Stock Fairly Valued?
Trying to assign a valuation for a company that is not profitable is dangerous for me. However I did a quick calculation of Fastly’s price/sales ratio based on its trailing twelve month revenue. I came up with a number of around 33. Now let’s compare that to Microsoft which has a price/earnings ratio (as of this writing of 34.68).
I understand that comparing Fastly to Microsoft in this way is not apples to apples. Fastly is not yet profitable. Microsoft is a titan of the tech sector. Investors should expect volatility with Fastly that they should not expect from Microsoft. And some would say Fastly is a pure play in the world of edge computing.
All of that may be true. But I can call it proven versus potential. And right now it looks as if investors are looking at the potential of Fastly and are not willing to move it ahead of the proven performance of Microsoft.
Is there good news to this? Well I suppose that it means that MSFT and FSLY stock could find a sort of correlation. But that’s where it becomes clear that Microsoft has many more paths to growth. This doesn’t mean that Fastly can’t succeed. It just means that it looks to be fairly valued. And that seems to be the opinion of analysts as well.
FSLY stock may soar to higher highs. But I don’t think it’s the pre-ordained conclusion that some are saying. If you’re going to jump on Fastly proceed with caution.
On the date of publication Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris Markoch is a freelance financial copywriter who has been covering the market for over six years. He has been writing for Investor Place since 2019.