Shares of edge-computing specialist Fastly (FSLY 4.43%) were slammed last week. The tech company caught investors off guard when management announced preliminary third-quarter revenue that was below its guidance for the period. Since the unexpected announcement, shares have slid about 33%.
After a third of Fastly's market value has been erased, is this a good time for investors to buy into this growth stock? I think so -- and here are three reasons why.
Image source: Getty Images.
But first: here's a look at what sent the stock spiraling downward.
Understanding Fastly's revised Q3 outlook
Last week, Fastly said it now estimates revenue for the period ending Sep. 30 to be between $70 million and $71 million. This was well below the company's initial forecast for revenue to be between $73.5 million and $75.5 million.
The company cited two primary reasons for its worse-than-expected revenue. First, usage from Fastly's largest customer (ByteDance -- owner of TikTok) didn't fare as well as anticipated because of the customer's "uncertain geopolitical environment," Fastly said in its press release. Second, a few additional customers experienced lower-than-anticipated usage late in the quarter.
It wasn't surprising to see Fastly stock react so sensitively to this news. Shares had risen more than 500% year to date. Expectations were high, to say the least. Indeed, even after this sell-off, the stock is still up more than 300% this year.
So, why isn't this a red flag? Why should investors be opportunistic and consider buying the stock after its sell-off?
1. Put yourself in management's shoes
Investors should realize that it's likely incredibly difficult to forecast revenue during these uncertain times -- particularly for a business whose revenue is determined by customer usage of its platform.
Unlike many of Fastly's software peers, the company does not have a predictable revenue stream of fixed-priced software subscriptions. Instead, Fastly operates as an infrastructure-as-a-service (IaaS) business model, with revenue moving in the same direction as total usage on its platform. This less predictable business model will likely lead to significant variance in a period's revenue from guidance during uncertain times. Of course, this can work in the company's favor (when usage is much higher than expected) sometimes, too.
2. Fastly remains fundamentally strong
In Fastly's Oct. 14 update on its preliminary third-quarter revenue, Fastly CEO Joshua Bixby went out of his way to ensure investors that the company's underlying business remains healthy: "While our preliminary third quarter results reflect the challenges of a usage-based model, we believe the fundamentals of Fastly's business remain strong, as does demand for our platform."
Indeed, Fastly's preliminary revenue range calls for about 42% year over year revenue growth. The edge computing specialist isn't just doing fine -- it's thriving.
3. Shares are significantly cheaper than they were
This final point is probably the most important: investors can buy shares at a much lower price today than they could a few weeks ago. Unfortunately, however, this may be the strongest reason many investors are doubting how they feel about Fastly.
It's difficult to stomach a sharp sell-off as a shareholder. It's often equally as difficult to buy a stock as it's falling. Investors, for instance, may be pondering whether shares will continue to fall. But a 33% haircut to the stock arguably more than compensates for a single quarter of worse-than-anticipated revenue -- especially when we're talking about a company still growing extremely fast.
Investors now once again have a chance to pick up shares of Fastly at a sub-$10 billion market cap -- not a bad deal for a disruptor in the fast-growing edge computing space.
Sure, this isn't the bargain territory Fastly stock saw earlier this year during the coronavirus market crash. But if you're planning to wait until Fastly stock looks like a steal before you invest, you could be waiting a while. With a recurring-revenue business model, a huge market opportunity ahead, and soaring revenue, shares might not get much cheaper than this.
Does this mean the stock won't decline from here? With a growth stock like this, volatility should be expected. However, for investors who buy shares today and hold for five years or more, I believe we will eventually look back and view this as a good entry point into a great company.
