Is this a Cathie stock? In the post pandemic era of investing, this is a legitimate question on Wall Street. Of course, we are talking about founder of Ark Invest Catherine Wood. Today, I am checking on the risk to Fastly (NASDAQ:FSLY) stock, which was on her list.
FSLY stock has fallen off a cliff in recent months. It peaked last year in October and it has since given up 68% of its value. Just in the last two weeks it shrunk by 40%. Clearly this is a broken stock and the decision today is to determine if it’s also a broken company.
Spoiler alert, I do not believe that this is the case.
Fundamentally, Fastly is not a typical SPAC hopeful without a current income stream. It actually has tangible fundamental metrics to back up the arguments for owning it. Revenues are now three times as much as 2017.
The company is still not profitable but it is still too early to judge on that front. Their primary job now is to grow sales, they can fix the profits line items later.
FSLY Stock Is Leaner and Meaner
The upside of having fallen so much is losing the froth from the stock price. FSLY stock now has a 15 price-to-sales ratio. This is close enough to mega-cap stocks like Facebook (NASDAQ:FB) and Microsoft (NASDAQ:MSFT).
Tesla (NASDAQ:TSLA) is also almost twice as expensive for another absolute comparison.
At these levels, those who are long FSLY stock are probably too late to panic. I am not calling an absolute bottom because it is tricky on even normal stocks. As fast as this one moves, it is darn near impossible.
The breakout last year was massive and it happened about this time. The buyers sharply accelerated their efforts from $35 per share. FSLY stock is now just 18% above that so it will lend strong support.
Threat to the Market
This is important today because the whole market is wobbly. Once it stabilizes, it is reasonable to expect easier FSLY upside than downside risk. Meanwhile, the drag from the overall market is indeed a threat.
So far, the indices have been setting records. The hot inflation reports are infusing uneasiness among traders. This could be early signs that the bears are ready to take the reins for a bit. Although this is no evidence of this yet, the risk looms above all stocks that trade within it. Regardless of how good the opportunity in one equity, that thesis has to play out within the collective.
In other words, if the stock markets are correcting there aren’t any stocks rallying.
Support Line Risk Below
Like a lot of the Nasdaq stocks, Fastly needs to hold last week’s lows. Losing that would accelerate the selling further. It is then possible for the bears to inflict 20% more pain.
The target could even be all the way back down to the pandemic base. Using options allows fans of the stock to make early bets.
Traditional investors have to buy shares at current price with no room for error. They are drawing a hard line in the sand and risking digits to catch the falling knife.
Options Strategy
Alternatively, I can sell the FSLY December $25 put and collect money for it. This trade does not need a rally to win. In fact, the stock can fall more than 40% from current prices and I can still break even.
The downside of selling puts is the limited profits. I am not one to ever complain about size of profits. This is a highly irregular market and I learned it is best to be ready for blind sides. There is no particular reason for the worry except that nobody else is worried.
The government is providing a massive prop to the economy with record stimulus packages. The Federal Reserve and the White House are infusing trillions into the U.S. economy. So the bulls have a tailwind for now. The CPI reports need to calm down or else it could force the Fed’s hand to taper early. So far, nothing has changed their commitment and they still promise us loose monetary conditions until 2023.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Nicolas Chahine is the managing director of SellSpreads.com.
