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Is Fastly Stock a Buy After Its Sell-Off Today?

By Daniel Sparks – Updated Aug 6, 2020 at 3:46PM

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Has the stock's decline following the company's second-quarter results gone too far?

Edge computing specialist Fastly (FSLY -4.87%) has been one of 2020's hottest stocks. Leading up to the company's second-quarter earnings release on Wednesday afternoon, shares had risen more than 440% year to date. With such a monstrous run-up, it's safe to say that investor expectations were sky high for the company going into its quarterly update.

In fact, judging by the market's reaction on Thursday to Fastly's stellar second-quarter results, expectations for the company had arguably become too high.

As of 11:20 a.m. EDT today, Fastly shares are down about 20% for the day, even though the company's second-quarter revenue blew past analyst estimates. Furthermore, shares are down more than 25% from highs earlier this week. Is this sell-off an overreaction? More importantly for investors, is this a good buying opportunity?

A person hitting a buy button on a keyboard

Image source: Getty Images.

Fastly's big second quarter

Without the perspective of Fastly's torrid run-up leading up to its second-quarter update, investors would have a difficult time understanding why shares of the growth stock are down so sharply on Thursday.

Fastly's second-quarter revenue rose 62% year over year to $74.7 million, a significant acceleration from 38% growth in the prior quarter. And the company's revenue easily beat analysts' consensus estimate for a top line of $71.4 million. Fastly also swung from an adjusted loss per share of $0.16 in the year-ago quarter to a surprise profit of $0.02. Analysts on average were modeling for an adjusted loss per share of $0.01.

Strong revenue growth also notably led to margin expansion. Adjusted gross margin expanded from 55.6% in the year-ago quarter to 61.7%.

Fueling the quarter was the company's biggest quarterly growth in customers since its initial public offering more than a year ago. Total customers increased from 1,837 in the first quarter of 2020 to 1,951.

Also driving revenue growth was a strong dollar-based net expansion rate (DBNER) of 137%. The metric, which measures spend from existing customers compared to a year ago, shows an acceleration in the rate of customer expansion compared to the previous quarter. DBNER was 133% in the first quarter of 2020.

"The need for a trustworthy and modern edge platform has never been more significant," CEO Joshua Bixby said in Fastly's second-quarter shareholder letter.

What gives?

If the results were so good, why is the stock down so much on Thursday? It likely stems both from red-hot investor expectations that were above and beyond even what analysts were expecting, and a disclosure from Fastly that ByteDance, the operator of TikTok, was its largest customer during the quarter. Specifically, management said in its second-quarter earnings call that TikTok represented 12% of revenue in the six-month period ending June 30. But less than 50% of that revenue is in the U.S., where TikTok faces a potential ban if it does not find a domestic acquirer.

Citing national security concerns, President Donald Trump has threatened an executive order to ban TikTok, which is operated by Chinese parent company ByteDance. But after Microsoft said over the weekend that it was exploring a purchase of TikTok and that a deal could be closed by Sept. 15, President Trump said he would permit the potential acquisition. 

A bullish outlook

While Fastly's exposure to TikTok certainly puts the spotlight on a key risk for the company, there's good reason to be excited about the future, too. Looking ahead, management was very bullish.

A bar chart with a trend line going up and to the right.

Image source: Getty Images.

"Despite the current global economic uncertainty, we remain optimistic about the demand for our mission-critical services and the underlying growth of our business into Q3 and future periods," Fastly said in its second-quarter shareholder letter. To this end, the company guided for third-quarter revenue to grow about 50% year over year. In addition, Fastly raised its full-year revenue outlook to between $290 million and $300 million. Previously, management said it expected revenue to be between $280 million and $290 million.

A buying opportunity?

Though it's not surprising to see Fastly stock taking a breather here, there were plenty of reasons for long-term investors to get excited about the bigger picture, including huge revenue growth, expanding margins, management's optimistic outlook, and more. On sale for 25% off the price it was trading at earlier this week, the tech stock looks like a good buying opportunity.

Daniel Sparks owns shares of Fastly. The Motley Fool owns shares of and recommends Fastly. The Motley Fool has a disclosure policy.

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