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Near a 1-Year Low, Is Fastly a Buy?

By Zhiyuan Sun - Updated Jun 14, 2021 at 4:20PM

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This under-the-radar edge computing stock has more than meets the eye.

Fastly (FSLY -2.68%) is a promising content delivery service provider whose stock has gone essentially nowhere when comparing prices from this time a year ago.

Its strong run-up in 2020 evaporated in October after the company's biggest client, ByteDance, the Chinese owner of Tiktok, pulled the plug on its content delivery services order with Fastly after former President Donald Trump issued an executive order that threatened to ban transactions with Tiktok by American businesses, citing privacy concerns. Trump called for TikTok to be sold to an American company if it wished to avoid further sanctions.

On June 9, President Joe Biden rescinded Trump's executive order and issued new orders that set criteria for the government to evaluate the risk of apps (like TikTok) connected to adversarial countries (like China). The new orders effectively get TikTok off the hook with regards to the Trump temporary ban efforts. The negotiations to sell TikTok to a U.S.-based company are on hold and now unlikely to be completed. Unfortunately, the loss of Fastly's then-largest customer -- which accounted for 12% of its revenue last year -- is potentially permanent.

Is there any hope for Fastly's stock price to recover its upward trajectory after such a setback?

Technicians analyzing a server network.

Image source: Getty Images.

A counterintuitive catalyst

Weirdly, Fastly's share price might have actually been more influenced this past week by an unusual event that occurred the day before Biden's June 9 announcement. A bug in Fastly's software configuration caused about 85% of the company's network services to go offline for about an hour. Investors jumped on the news, but actually sent Fastly's shares higher by more than 10% rather than crashing them.

It can be a bullish signal when stock prices go up in the face of what was apparently bad news. Due to the outage, websites utilizing Fastly's services and operated by The New York Times, Twitch, CNN, the BBC, Shopify, Pinterest, Amazon, Reddit, and eBay all were made temporarily inaccessible. 

But what the outage did was reveal the caliber of Fastly's clientele, effectively reassuring surprised stockholders of its strength. Fastly disclosed the identity of only 43 out of 336 of its enterprise customers. The identity of several other big-name clients leaked following that June 8 outage. Nobody expected Fastly to have this degree of relevance in the global internet ecosystem and that got investors excited. 

Is the stock a buy? 

In terms of the price-to-sales ratio, Fastly's stock valuation has become a lot cheaper, from around 50 last October down to 17 now. Moreover, during Q1 2021, its revenue increased by 35% year over year to $85 million. That is not far off from its revenue growth rate of 38% in Q1 2020 when it still had ByteDance onboard. 

Fastly's content delivery services are well-loved by its clients. It consistently maintains a net retention rate of 140%, meaning that spending from existing customers far outweighs its churn rate and is growing. The company has expanded its access to 58 markets in 26 countries, delivering up to 130 terabytes of content data per second. 

Compared to Q1 2020, its net loss remains roughly unchanged at $14 million. Part of the reason why investors don't seem to like the stock is its negative cash flow. However, that's because the company dedicates an astonishing 34% of its revenue to further its research and development.

At this stage, dedicating more to R&D to help grow its clientele and revenue is far more important than breaking even in what has become a hyper-competitive environment. What's more, Fastly has more than $1.1 billion in cash and investments to offset such losses. Overall, given its importance in the internet ecosystem, strong revenue growth, and top-notch services, Fastly is looking like a fantastic tech stock to buy now, despite the rare service outage. 

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Zhiyuan Sun has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon, Fastly, Pinterest, and Shopify. The Motley Fool recommends eBay and recommends the following options: long January 2022 $1,920 calls on Amazon, long January 2023 $1,140 calls on Shopify, short January 2022 $1,940 calls on Amazon, short January 2023 $1,160 calls on Shopify, and short June 2021 $65 calls on eBay. The Motley Fool has a disclosure policy.

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