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Is Fastly Stock a Buy After Cratering?

By Daniel Sparks – Aug 5, 2021 at 7:18PM

Key Points

  • A recent major outage negatively impacted the edge computing company.
  • Revenue growth is slowing as Fastly faces tough comps.
  • Shares are significantly cheaper than they were earlier this year.

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Shares are down more than 60% from recent highs.

Shares of edge computing specialist Fastly (FSLY 1.39%) have cratered recently, falling more than 60% from highs earlier this year and a total of 54% year to date.

Ouch.

Of course, the pain isn't as bad when investors zoom out. Since the beginning of 2020, shares are up 100%.

Nevertheless, given the stock's recent pullback, some investors may be wondering if now is a good time to buy the edge computing company's stock. The answer might surprise you.

A person looking at charts on a laptop.

Image source: Getty Images.

Slowing growth

Fastly's recently announced second-quarter results provide investors with a timely look into the company's business. Revenue grew 14% year over year to $85 million. This was a significant deceleration relative to the company's 35% growth in Q1. However, a sharp deceleration was expected, as Fastly faced a tough comparison in the year-ago quarter when internet usage spiked as consumers sheltered at home.

Though revenue would have been better if it weren't for a global outage that affected almost all of the company's customers.

"The outage resulted from an undiscovered software bug that was triggered by a valid customer configuration change," explained Fastly CEO Joshua Bixby in the company's second-quarter earnings release. "We detected the bug within one minute and returned 95% of our network to normal within 49 minutes, but our customers were negatively impacted," he said. 

Not only did traffic volumes decrease because of this outage (bad news for a company with a usage-based business model) but Fastly also issued credits to clients following the outage.

Adding to the bleak narrative, the midpoint of management's Q3 revenue guidance for $82 million to $85 million unfortunately represents a sequential decline.

No profits

Another issue for Fastly is the company's profitability (or lack thereof). Fastly said it expects a non-GAAP (adjusted) operating loss between $75 million and $65 million for the full year. In addition, the company lost $58 million on a GAAP basis in Q2 alone.

Further, Fastly's non-GAAP gross profit margin is worsening, narrowing from 61.7% in the year-ago quarter to 57.6% in the second quarter of 2021.

A pricey valuation

Given how much money Fastly is losing and the revenue headwinds it is facing, investors may want to look for more evidence of a strong business before they get bullish on the stock. Alternatively, they can wait to see if shares eventually trade at a more attractive valuation.

Shares aren't cheap. Indeed, they're arguably quite pricey. While Fastly stock has fallen sharply this year, it is still priced for significant growth over the next five to 10 years. After all, the company has a $4.6 billion market capitalization but generated just $313 in trailing-12-month revenue.

There's no reason to rush into an investment without a clear path to substantial profits down the road to support the stock's high valuation. Investors may want to either look for a better price or wait to see if the company can demonstrate improved business momentum.

On the other hand, Fastly shareholders may want to think twice about panic selling. Once the company makes it through its current challenges, including difficult comps, maybe there will be somewhat of a regression to the mean and the company will start putting up some impressive numbers.

Daniel Sparks has no position in any of the stocks mentioned. His clients may own shares of the companies mentioned. The Motley Fool owns shares of and recommends Fastly. The Motley Fool has a disclosure policy.

Stocks Mentioned

Fastly Stock Quote
Fastly
FSLY
$10.20 (1.39%) $0.14

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

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