What happened

Shares of Fastly (NYSE:FSLY) jumped 45.6% in August, according to data from S&P Global Market Intelligence, as investors digested the market's initial negative reaction to the recently IPO'd edge-cloud platform company's inaugural quarterly report as a public company.

Fastly stock plunged nearly 30% in the week following its second-quarter release on Aug. 8, when the company said its revenue had soared 34% to $46.2 million, translating to an adjusted net loss of $9.9 million, or $0.16 per share. Analysts, on average, were modeling a narrower net loss of $0.13 per share on revenue closer to $45 million. 

Man in suit drawing an up arrow with his forefinger.


So what

It's not terribly surprising to see a fast-growing, yet-to-be-profitable business like Fastly outperforming on the top line and -- partly as a consequence of that unprofitable revenue -- missing Wall Street's estimates for earnings. In these early stages of its long-term growth, there are no guarantees that higher sales will translate directly to greater operating leverage.

It didn't take long for some analysts to take note. Shares subsequently rallied more than 80% from their August lows, driven by both Fastly's relatively small float and a bevy of analysts suggesting clients buy the stock after the drop.

Now what

So, where does that leave investors today? Personally -- and keeping in mind Fastly only just went public in the middle of May -- I tend to avoid such stocks so soon after their offerings precisely because of this kind of post-IPO volatility. Just yesterday, for example, Fastly was among a group of high-flying, cloud-based tech stocks that fell hard despite a relative lack of company-specific news.

That's not to say Fastly can't continue to rise from here, however -- especially if it's able to maintain its top-line momentum in the coming quarters. But for now, I'm content observing from the sidelines until I get a better feel for whether Fastly's growth and market opportunity can justify its recent gains.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.