What happened
Shares of Fastly (FSLY +11.13%) crashed 19.5% in November, according to data from S&P Global Market Intelligence. The edge cloud platform posted better-than-expected earnings results for the third quarter but still saw its share price decline sharply in the period.
So what
Fastly sells cloud computing power at the "edge" of the cloud, which at its most basic level means closer to the end user's computing device such as a smartphone. Customers pay Fastly for these services to help speed up their applications for customers, which can get slower if only utilizing cloud datacenters in centralized or far away places.
Image source: Getty Images.
The company released its third-quarter earnings on Nov. 3. Revenue came in fairly strong, growing 23% year-over-year to $87 million, significantly better than the $83.7 million expected from the Street. Fastly is still unprofitable, with a $55 million operating loss in Q3 and $30.5 million in negative operating cash flow over the first nine months of this year. Unprofitable growth stocks took a beating in November, so it is not shocking that Fastly stock is down so much even after posting positive growth numbers for Q3.
Management is guiding for $350 million in revenue this year at the high end of its guidance. If it hits this revenue target, Fastly will grow revenue approximately 21% year-over-year from 2020, when it had $291 million in revenue. It is unclear if/when the business will turn a profit, but with its current expense base and high operating losses, it likely will not come anytime soon unless revenue growth starts to accelerate.
Now what
Fastly is down 56% this year, and now has a market cap of $4.42 billion. This gives the stock a price-to-sales ratio (P/S) of 12.6 based on its 2021 revenue guidance of $350 million. This is quite expensive, especially considering that the company has never generated consistent profits. Investors in Fastly will likely need to expect strong double-digit sales growth for many years in order to fulfill this valuation unless Fastly can achieve 30% or 40% profit margins.
Don't get fooled by the recent drop in Fastly's share price, the stock is still very expensive. This doesn't mean you shouldn't buy shares, but you do need to be confident in the company's long-term trajectory before doing so.
