I love digging below the surface and finding stocks that the investment community is ignoring. Before the novel coronavirus shook up the world, Fastly (NYSE:FSLY) fell into that camp. However, FSLY stock didn’t stay a secret for long.
This company was led by the great Artur Bergman, who founded the company in 2011. However, almost a year ago he stepped down as CEO and into the role of chief architect and executive chairperson.
Bergman understands his company’s operating space — and more importantly, the future of that operating space — better than perhaps anyone in the world. In my view, Wall Street continues to undervalue the future of this space, the edge cloud.
However, that’s not to say investors are not aware of it, which was the case before Covid-19.
After Covid-19 created its initial shockwaves — and FSLY stock fell to just $10.63 at its low — the stock quickly found its stride. By July 9, shares closed north of $100. The secret was out.
More Speed, Fastly!
What created this urge for growth and demand for edge-cloud computing? Simple. Businesses needed it.
When Covid-19 came along, it forced all sorts of changes. However, most of those changes started taking place on the internet. Consumers streamed more entertainment. Business was conducted over video calls, chats and email rather than in conference rooms. Shoppers went online rather than into the mall.
All of these trends were in play before. But it was as if someone was slowly accelerating onto the freeway, then stomped the gas pedal to the floor once Covid-19 came along. Suddenly, years worth of demand — what management teams were expecting in 2024 or 2025 — was happening right now.
With consumers and workers increasing their digital use, companies needed to too. In order to keep up with that demand, these companies needed to utilize an edge cloud, one of which is run by Fastly.
The background to that explanation is lengthy, but important. It’s important because it highlights why Fastly has staying power once the coronavirus is gone. Because these trends were in play before Covid-19, they’ll be in play after it as well.
Is FSLY Still a Good Investment?
Anytime a stock rallies more than 1,000% in less than a year, it’s fair to ask whether it’s still a good investment. I think investors can continue to accumulate this name, even as shares are still around $86 and commanding a market capitalization of almost $10 billion.
With the stock being down more than 35% from the highs, that looks more like an opportunity than a warning to me. Obviously a larger dip in the market would have a negative effect on FSLY stock — as with most stocks — but the business trends remain strong for this company.
First, keep in mind that the stock has been digesting its gains for months now. Shares are below the July high, as FSLY stock continues to consolidate. Regarding the stock price, I will just say this: I don’t think Fastly is being overvalued now; I think it was being severely undervalued before.
Every company that operates significantly on the internet will be forced to the edge. It’s like how every company was eventually forced into the cloud. In order to have a good customer experience, business will take place on the edge, and with Fastly’s Compute@Edge product, they are the best in the business.
It does raise a question of security, but after its latest acquisition and with the announcement of its Secure@Edge product, Fastly will be ready to capture those revenues, too.
Fastly is forecast to do about $290 million in sales this year. Next year, those estimates jump to $381 million, followed by $490 million in two years. Sometimes with growth names, you just need to accumulate the stock and let the long-term business trends do the heavy lifting.
The Bottom Line on Fastly
This company has everything that I like to see — although I would have loved to see it spend more time under the radar. Regardless, Fastly stock is a winner.
Its balance sheet boasts total assets of $631.5 million vs. total liabilities of just $96.3 million. That’s with more than $400 million in cash and equivalents and about $26 million in debt. It also has positive operating cash flow, while working toward being free-cash-flow positive.
Fastly did find itself in the spotlight a bit, which happens when your stock rallies more than 1,000% inside of a year. However, its largest customer accounted for more than 10% of its revenue, but had one big issue: The White House.
TikTok was this customer, and the White House’s issue with the company put Fastly in a tough spot. Essentially, the White House was forcing a sale of TikTok or kicking it out of the country. Long story short, TikTok switched from Fastly as a way to protect itself if its business was cut off. While that dealt a blow to revenue, I think the large sell-off that ensued is a major opportunity for investors.
Short-term pain will equate to long-term gains with FSLY stock.
On the date of publication, Matt McCall did not have (either directly or indirectly) any positions in the securities mentioned in this article.
The InvestorPlace Research Staff member primarily responsible for this article held a long position in FSLY.
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