Cloud-computing services provider Fastly (NYSE:FSLY), which primarily focuses in the content delivery network (CDN) space to optimize delivery of web and mobile-based data, is in desperate need of its own medicine. Following a Morgan Stanley downgrade amid concerns of demand-related risks, FSLY stock dropped approximately 15% in the morning session, only modestly paring losses later in the afternoon.
Analyst Sanjit Singh demoted FSLY stock from “equal-weight” to “underweight” while also reducing the price target to $12. Previously, Singh forecasted shares to hit $18. This disclosure comes as a slap in the face to Fastly shareholders. The revised target only represents about a 3% lift from the current, as of writing, price of $11.63.
However, Singh is not the only bear on Wall Street. Throughout this year, other high-profile investment firms such as Bank of America, Citigroup and Piper Sandler reduced their price targets for FSLY stock. Notably, Citigroup set a “sell” rating for Fastly while Piper Sandler went with a “neutral” outlook. Overall, MarketBeat reports that Fastly features an average rating of “hold” and a consensus price target of $23.88.
Fundamentally, Singh sees several demand-related issues negatively impacting FSLY stock. First, Fastly’s key verticals such as e-commerce and media may suffer reduced traffic volumes. Another point is that the company’s pure consumption business model may be more vulnerable to demand loss than competing firms utilizing traditional software as a service (SaaS) business models.
As well, Fastly has “a long path to achieving operating profitability and positive cash flow,” a matter in which the exit of CEO Joshua Bixby and rising competition don’t help.
FSLY Stock Balances Despair With Optimism
One of the major beneficiaries of the Covid-19 pandemic, Fastly’s CDN business skyrocketed as shelter-in-place protocols dramatically increased demand for online data transactions, both for personal and professional ventures. However, as the worst of pandemic has passed and firms have adapted, FSLY stock no longer began occupying the three-digit price zone.
Instead, the security is doing all it can to stay in double-digit territory, a wild change of fortunes. Certainly, Morgan Stanley’s dim view of FSLY stock doesn’t spark much confidence. At the same time, investors must consider that Fastly’s challenges are not exclusive to the company. For instance, sector rivals Akamai Technologies (NASDAQ:AKAM), Edgio (NASDAQ:EGIO) and Cloudflare (NYSE:NET) are all down to varying degrees on Monday.
Furthermore, while the CDN space is troubled, Fastly’s consumer business model — also known as pay-as-you-go or usage-based pricing — is actually flexible in favor of its enterprise-level clients. Indeed, one of the reasons why streaming services have stolen market share from traditional TV subscriptions is the aforementioned flexibility.
With inflation destroying the dollar’s purchasing power, it’s very possible that companies will prefer pay-as-you-go services as opposed to flat-fee SaaS platforms.
Insider Transactions Tell Quite a Tale
Before making a major move with FSLY stock, it may be instructive to consider the security’s insider transactions list. While Fastly director Daniels Richard Devon bought 5,000 shares on June 1, 2022, the overwhelming majority of transactions going back to early 2019 are for sell orders.
To be clear, different motivations exist for insider sells. However, the incongruency between what the people closest to the business are doing relative to the public marketing message may lead to broader hesitation for FSLY stock. Therefore, prospective investors should tread carefully.
On the date of publication, Josh Enomoto 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.