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Why Fastly Stock Plunged Today

By Timothy Green - Jun 29, 2020 at 11:05AM

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The epic rally has taken a breather.

What happened

Shares of edge cloud platform provider Fastly (FSLY -0.41%) slumped on Monday, down 10% by 11:15 a.m. EDT. There was no company-specific news, and the major stock indices were in the green. Fastly's plunge may be a simple case of a stock that has risen too far too fast.

So what

Fastly stock has been swept higher since bottoming out in March as investors flocked to so-called work-from-home stocks. Since the start of the year, shares of Fastly are up nearly 290%.

A cloud containing electricity

Image source: Getty Images.

Fastly's results have been fine, although not exactly earth-shattering. First-quarter revenue rose 38% to $63 million, and the company booked a net loss of $12 million. Fastly did raise its guidance for 2020, and it now expects total revenue between $280 million and $290 million.

The problem is not the company's performance but the stock's valuation. Before Monday's dive, Fastly was valued at nearly $9 billion. That's a price-to-sales ratio, based on 2020 sales guidance, of more than 30. While revenue is growing quickly, Fastly is far from the fastest-growing subscription software company out there.

Now what

Will Fastly be a good investment if bought today and held for years? The answer depends on the company's performance -- and on whether the valuation today makes any sense at all. Fastly is not profitable, it's not cash flow positive, and its revenue growth rate is not particularly impressive compared with other software-as-a-service (SaaS) stocks.

The fundamentals haven't mattered at all to investors over the past few months as Fastly stock has rocketed higher. But they'll matter eventually.

Timothy Green has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Fastly. The Motley Fool has a disclosure policy.

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