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Is Fastly Stock a Buy?

By Anders Bylund - Jan 20, 2021 at 7:21AM

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It's not a cop-out to say that the answer depends on your investing style.

Cloud networking specialist Fastly (FSLY 4.35%) is on a roll right now. The content delivery network (CDN) expert's stock has nearly quadrupled in 52 weeks, boosted by a combination of COVID-19 lockdowns and the rise of streaming video services. Is it too late to pick up this skyrocketing stock, or are Fastly shares still a good deal at these lofty prices?

By the numbers

Fastly is ridiculously expensive from pretty much every possible angle. The company's earnings, free cash flows, and earnings before interest, taxes, depreciation, and amortization (EBITDA) are all negative, making it impossible to measure the stock by ratios such as price-to-earnings or price-to-EBITDA. The company does have significant sales adding up to $267 million over the last four quarters, but that gives us a nosebleed-inducing price-to-sales ratio of 42 times trailing revenue.

A hand points a remote control at a wall of several dozen TV screens, all showing different images.

Image source: Getty Images.

As a high-octane growth stock, Fastly's market value more closely relates to the company's ability to deliver impressive growth on the top and bottom lines. That's still a mixed bag at best. Sales rose 42% year over year in October's third-quarter report, but your average analyst had been expecting a growth rate closer to 47%. Most of the profitability metrics I listed earlier are moving further below the breakeven line, not closer to it. One of Fastly's largest customers, Chinese social media service TikTok, removed most of its video traffic from Fastly's service by the end of the third quarter.

That report triggered a sharp sell-off on Fastly's stock. Share prices are still hovering 30% below mid-October's yearly highs.

A red charting arrow bounces skyward off a black trampoline.

Image source: Getty Images.

Where's the good news?

The recent 30% discount is a good start. Valuation was always the biggest problem with Fastly's stock. The TikTok panic mitigated that issue.

On top of that, I don't see why TikTok wouldn't move back to Fastly's services in 2021. The Trump administration never enforced the ban, and the incoming Biden team isn't likely to pursue a similar China policy. Fastly's edge computing tools are not easily replaced by less sophisticated CDN platforms, so it's a fair bet that the top-line damage from TikTok's fading orders will be repaired in short order.

Not right away, mind you. When Fastly reports Q4 results on Feb. 17, the update will cover an operating period when TikTok still could have been ordered to close its North American operations. Therefore, I don't expect Fastly's Q4 sales to be great, but the guidance for the next fiscal year should make up for it.

It's sort of an acquired taste

Long story short, Fastly is getting its largest customer back, and the slowing revenue growth should speed up again. These factors should spur renewed growth on Fastly's stock chart.

I'll admit that Fastly isn't the best stock for everybody. Brassbound value investors should look elsewhere, but some of us see a serious discount on a fantastic growth stock instead. Fastly is a great buy for growth investors right now.

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