One of the undisputed facts about investing is that stocks fall, but the severity of the drop isn't always justified. Content delivery network (CDN) specialist Fastly's (FSLY 1.10%) stock recently tumbled as much as 51% on news that TikTok parent ByteDance -- Fastly's biggest customer -- reduced its traffic on the platform in response to a pending ban by the U.S. government. While some investors were selling off the stock, others saw it as a buying opportunity.
In this Earnings Review episode that aired on Fool Live on Oct. 28, Fool.com contributor Danny Vena addresses why Fastly tumbled and why he viewed it as an opportunity to double down on the stock.
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Danny Vena: Well, I'm going to read the question first. "Hi, Danny. I read your article on Fastly. Can you comment on this more in regards to the gains so far this year from $25 up to $128. What is your justification for doubling down at $72?"
Now, first of all, we should just take a minute to talk about the reason Fastly is down so much or one of the biggest reasons, is because Fastly's largest customer is TikTok and represented about 12% of revenue in the most recent quarter. One of the things that they said, because they charge on a use basis -- the more a customer uses their services, the more they get paid. In this case, spending by TikTok slowed down a little bit and so Fastly took a little bit of a tumble.
I'm looking at the fact that Fastly is a fast-growing young company that they're building their customer base around TikTok. TikTok is a large part of their revenue base right now, but it's gradually going to become smaller as time goes by. Meanwhile, the fact that Fastly is one of the fastest growing content distribution networks. Yes, there's competition out there, but they appear to have built a better mouse trap.
Now, the question though really is, why did I double down at $72 on a stock that's gone from $25 to $128? What I want to talk about is anchoring. A lot of folks forget that you can add to your winners. In order to do that, you actually tend to pay a higher price for subsequent purchases than you did for your initial price. A lot of times investors will get hung up on, "But I bought it at $25. I don't want to buy it at $128 or $72."
What I'm looking at is the fact that this company has a really large addressable market, which I talk about in the article. I went ahead and put that article into the chat there, so if anybody wants to click on the link there, that article came out today. I think that Fastly has a really bright future. It doesn't matter if you bought it at $25, or $72, or $128, if down the road that stock is worth $1,000.