Shares of next-gen internet infrastructure outfit Fastly (NYSE:FSLY) have been living up to their name this year. With Web traffic soaring during the pandemic, the company has picked up plenty of new business and the stock is up more than 300% as a result.
However, the epic run higher includes a recent double-digit sell-off after Fastly issued weaker-than-forecast revenue for Q3 2020. I'm not surprised. I issued a bullish call and made a small purchase back in the early spring as Fastly looked undervalued, but I felt as if investor optimism through the summer was getting way out of hand, so I parted ways to invest in better values. But after the most recent sell-off, I plan on buying a few shares again.
Do as I say, not as I do
First off, I should address the fact that I sold my shares of Fastly over the summer. I am not a market timer, opting instead to buy companies I think have lots of potential over the long term and adding to positions over time if the thesis holds true. Selling Fastly was an exception. My reasons for buying the stock had not changed, and part of me regrets ever selling in the first place (even though my sale price was far higher than where the stock currently stands).
But I just couldn't get over this chart (see below). As a high-growth company, Fastly has a share price that follows its sales growth, since the company operates at a steep loss and has no plans to change that anytime soon. And while revenue growth has accelerated this year, the stock price has handily outpaced it and at moments had valued the company at well over 40 times trailing-12-month revenue. As great as Fastly's results were, I didn't see the acceleration in revenue as sustainable, and the suddenly steep premium was just too much for my taste.
What that chart doesn't include are Fastly's preliminary Q3 2020 results. Revised guidance for revenue of $70 million to $71 million is lower than the previous forecast of $73.5 million to $75.5 million, because of "geopolitical issues" -- specifically, its biggest customer, ByteDance-owned TikTok was at the center of a U.S.-China war-of-words drama. The lowered bar still represents at least 40% year-over-year growth, but suffice it to say that many investors were expecting the company to exceed guidance rather than miss it.
But 40% growth is nothing to balk at, and it also doesn't reflect the just-completed $775 million acquisition of edge computing security firm Signal Sciences. Fastly has more than just TikTok driving its results as well. It also has a hand in e-commerce, supplying Web traffic infrastructure for some growing players on that front. I'll thus take my chances here and start another small position in Fastly -- probably at 0.5% or less of my total portfolio value, which gives me room to purchase more later on if the business can maintain some momentum. Turns out my bad stock-selling behavior totally by chance yielded me a lower entry price point.
Here's the thing with Fastly...
I will probably always keep this position very small, though. As a content delivery network (CDN), Fastly operates in a market that's highly competitive and fragmented -- and for good reason. CDNs are internet infrastructure, and the smooth operation and safety of the internet favors lots of players rather than just a few. This is not going to become a name synonymous with the operation of the World Wide Web. The very operational fabric of the global network depends on it.
But does it have a shot of scooping up market share? You bet. The biggest incumbent in the legacy CDN pure-play space, Akamai (NASDAQ:AKAM), hauled in over $3 billion in revenue over the past year to Fastly's $266 million, assuming Fastly's quarterly update holds. In addition, Web traffic is still on the rise, creating plenty of new opportunities for small Fastly to keep expanding. Akamai stock is thus worth a look as well.
I think Web usage will keep heading north, though, and the big sell-off in Fastly brings the valuation back to a more reasonable level. I'll purchase another starter position again by the end of October.