Fastly (FSLY -3.12%) had a banner year in 2020. The provider of content delivery network (CDN) services was already on a roll thanks to explosive growth in the market for video streaming services, and then two massive events threw more fuel on Fastly's fire. The stock has now gained 386% year to date. Is Fastly still a buy at these lofty share prices?
Signs of huge rocket fuel supplies
Some of Fastly's growth engines should continue to run hot for years to come. Streaming media is becoming mainstream around the world, and there are battles brewing that will determine the long-term winners and losers in many countries.
Most of the contenders are using CDN services from Fastly and others in order to deliver smooth video experiences without tiresome buffering. Veterans like Netflix (NFLX 0.28%) and Amazon (AMZN 1.41%), with its Prime Video, have their own CDN solutions, but even they have been known to use third-party content networks on a case-by-case basis. This market will supply rocket fuel to Fastly for years to come.
Video clips are also hitting the main stage for social networks these days. One great example of this is the TikTok platform, owned and operated by Chinese company ByteDance. The Trump administration threatened to block TikTok from doing business in the U.S., immediately capping Fastly's skyrocketing stock chart because TikTok was the company's largest customer at the time. Trump appears to have lost interest in the TikTok situation since the election in November, and federal courts have effectively blocked the ban.
So Fastly's share price has been rising in recent weeks because investors see a future where TikTok continues to play a large role in this business. But even if not, Fastly will be on the short list of service providers for the next social network that wants to promote a video-sharing service with a massive posting volume.
Reasons to stay away from this stock
The third driver of Fastly's massive growth in 2020 is more of a temporary boost. The COVID-19 pandemic should peak in early January and then start fading away over time. There is more than one effective vaccine on the market and people should be getting the hang of those social distancing guidelines by now. The incoming Biden administration could promote another round of coronavirus lockdowns somewhere between January and March, but I would be surprised to see more than that. Therefore, Fastly's revenue growth should slow down a bit in 2021.
Fastly is trading at huge valuation ratios, such as 43 times trailing sales and 19 times the company's book value, and I can't give you any profit-based ratios because every bottom-line metric is printed in red ink. The stock's soaring valuation is based on Fastly's skyrocketing sales growth, and even a brief pause in that trend would be enough to trigger a sharp sell-off in this high-flying stock.
Some investors are ready to cash in their Fastly winnings at the first hint of trouble. Others will be genuinely surprised when the slowdown arrives, smashing the sell button in a panic.
You can bet on Fastly for the long haul
I added Fastly to my own portfolio in October, right after the government's TikTok action shaved 30% off its share prices. The potential loss of a single customer, albeit a large one, didn't scare me then, and it doesn't scare me now. The stock has barely outperformed the S&P 500 market tracker since then, but I'm in for the long run.
The company offers a unique combination of high-speed CDN services and low-latency edge computing tools, both of which should be in high demand for many years and even decades.
The only way Fastly's high-octane growth might stop in the foreseeable future is if a large tech company decides to buy the company in order to fill a gaping hole in its content delivery plans. In that case, I'll pocket the buyout premium and move on. Otherwise, I expect Fastly to earn its crazy valuation by keeping the accelerator pedal firmly pressed to the metal. This company is a near-guaranteed winner in this increasingly digital world.
And remember: People thought Amazon and Netflix were insanely expensive 10 years ago. If you sold those stocks in 2010, you're missing out on these amazing returns:
I'm not asking for much. Fastly can deliver market-crushing returns with just a fraction of Amazon's or Netflix's long-term success.