What happened
Shares of edge cloud platform provider Fastly (FSLY 1.41%) plunged by 31.8% through the first six months of 2021, according to data from S&P Global Market Intelligence. The stock is currently down 42% year to date.
Fastly shares had a great run in 2020, trading up by as much as 437% from their 2019 IPO price. This year, however, the company's earnings reports have disappointed investors, pulling the stock back down to earth.
Image source: Getty Images.
So what
Fastly offers edge computing services, which speed up computing and internet requests (hence the company's name) by placing servers closer to end users. Its clients include Stripe, Wayfair, and Shopify, which pay Fastly to help improve their user experiences.
Edge computing services offer a great value proposition for customers, and researchers suggest the industry could grow at an annualized rate of more than 34% over the next five years, hitting $15.7 billion in annual spend by 2025. These projections likely added to investors' bullishness about Fastly's prospects, lifting the stock to a price-to-sales (P/S) ratio north of 40 last fall.
However, at least in the first half of 2021, Fastly has struggled to live up to the hype. In Q1, its revenue grew 35% year over year to $85 million, which is faster than most companies manage. But given its high valuation, investors were likely expecting better results. When it delivered its Q1 report, it updated its revenue guidance for the full year to a range of $380 million to $390 million. If Fastly hits the midpoint of that range, that would be 32.3% annual growth -- a solid result, but likely not one deserving of a P/S ratio above 40.
Now what
If you are a Fastly shareholder, you are likely disappointed with the stock's recent performance. But the good news is that for prospective investors, the stock's valuation has gotten a lot more reasonable over the last few months. It still trades at a premium multiple, at least from a P/S perspective, but if you are bullish about Fastly's prospects and the trend of rising outlays on edge computing services, now could be the right time to buy some shares of this growth stock.
