Please ensure Javascript is enabled for purposes of website accessibility

Is Fastly Stock a Buy?

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

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Fastly, Inc. Stock Quote
Fastly, Inc.
FSLY
$13.20 (4.35%) $0.55

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
336%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/26/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.