The last time I wrote about Fastly (NYSE:FSLY) was in early November. At the time, I suggested FSLY stock was a good buy in the $70s. The fact it was trading in the high $60s made it an absolute buy for anyone on the fence.
Since then, the content delivery network (CDN) specialist’s stock jumped as high as $85 before settling back into the high $70s.
So, the question I’m asking myself at this point is whether FSLY is a $70 or $90 stock? Here are my thoughts on both.
FSLY Is a $90 Stock
When I last wrote about Fastly in November, the biggest worry for many investors appeared to be the looming Nov. 12 deadline set by Trump’s Committee on Foreign Investment in the U.S. for ByteDance, TikTok’s Chinese owners, to divest its U.S. intangible and tangible property related to the social media platform.
As my InvestorPlace colleague, David Moadel, noted in his Nov. 23 article, the deadline came and went, giving Fastly shareholders a big reprieve.
“[O]n Nov. 13 the Department of Commerce reported that it would not enact the U.S. TikTok ban,” Moadel wrote.
“To be more precise, the Department of Commerce said that it won’t enforce the order barring TikTok from operating in the U.S. ‘pending further legal developments.’”
In other words, unless new evidence comes to light that suggests TikTok is a U.S. security threat, the social media platform can continue to grow its business in the U.S. without government interference.
Of course, that could change, but for now, the one big question mark slowing Fastly’s growth has been put to the sidelines.
I never really felt like the TikTok situation was a death knell for the company. That’s because when it reported its Q2 2020 earnings, even though it admitted that TikTok accounted for 12% of its revenue in the first six months of the year, less than 50% was from the U.S.
So, that’s 6% of $137.6 million, or $8.3 million. Hardly a make-or-break number if you ask me.
“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,” I wrote on Nov. 5.
My colleague didn’t seem to like Fastly’s Q3 2020 results.
I didn’t see a problem with them as all the metrics going in the right direction – revenue rose 42%, enterprise customers grew by 3%, non-GAAP gross margin was 330 basis points higher, operating expenses were 82% of revenue, and free cash flow was positive for the first time – suggesting further growth will solve all of its profitability issues.
For this reason, it will be a $90 stock soon.
It’s Only Worth $70
InvestorPlace’s Josh Enomoto is one of the few contributors on this site who has a negative opinion of Fastly. His article from mid-November is a must-read if you’re of the same mindset.
“Fastly stock had a 78.5% correlation coefficient with new daily novel coronavirus cases in the United States,” Josh wrote on Nov. 11.
“I explained, ‘In other words, as Covid cases increase, so too does the market value of Fastly and vice versa. And that’s why I say that FSLY’s trajectory depends on Dr. Fauci.’”
How’s the correlation panned out?
Well, on Nov. 11, there were 142,860 new cases. On Dec. 1, there were 184,174 new cases. In the three weeks since my colleague’s article, FSLY stock is up 12%. If you believe in this theory, any vaccine news is likely to push its share price lower.
Enomoto finished his article by suggesting that the better play when it comes to Fastly is to use the volatility angle to your advantage. Up or down, FSLY tends to make big moves in either direction. Trading near its high for the last month, it could be ready to dive lower as the vaccine news continues to get better and better.
In the past year, Fastly’s stock’s had three major corrections, the last one being a doozy, falling by 50% in the second half of October.
Given its Q3 2020 earnings negativity by some media, a 13% correction from current prices to $70 would not be an extraordinary event.
The Bottom Line
I will continue to believe that Fastly’s doing enough right to push its share price higher. If it delivers evidence in future quarters that suggests the competition brings a good fight, I’ll change my tune.
Until then, I believe FSLY is a $90 stock, not $70.
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.