It's been a rocky road for cloud computing stock Fastly (FSLY -1.12%) in recent quarters, and there may be more hurdles ahead. In this segment of Backstage Pass, recorded on Dec. 22, 2021, Fool contributor and Fastly investor Danny Vena shares with fellow Fool Rachel Warren why he's feeling bearish on the company's prospects in the new year.
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Rachel Warren: According to a report last week by Barron's, a Morgan Stanley analyst said the DocuSign was no longer a buy downgraded it, slashed its current price target down to $165 from $350. That's an example of a top stock that has sunken considerably from its all-time high.
Jumping off of that point, what's a stock that you've shifted your investing thesis about in 2021? This could mean you are more positive about the long-term direction of the company or maybe you're more bearish about the company entering the new year. Danny, why don't you take this one first?
Danny Vena: I'm going to try to get through this quickly because on this particular topic, I tend to go into too much detail. [laughs] But back in October of last year, I doubled down on my position in Fastly. Fastly is a company that has a content delivery network, it helps speed up the amount of time that it takes for a website to load for folks. They have strategically placed servers around the world.
One of the reasons that I did that was because the stock dropped by 40% after the company lowered its guidance by about 5%. Management cited a couple of factors when it did that.
It said that its largest customer, which was TikTok parent, ByteDance, was not spending as much as expected because of the uncertain geopolitical environment. Folks may remember that this time last year, there was some saber rattling going on between Washington DC and China. I thought that that 40% haircut was a little bit overdone.
As it turns out, maybe the market knew something that I did not because since then, since I doubled down on my position in Fastly, the stock has declined another 45%. The reason that that has happened, and I am going to just go back to another couple of slides here real quickly. This one is a copy of their most recent earnings report, and their top-line growth was 23% year-over-year, which for a software-as-a-service company is not very impressive.
Just to give that some context, here is the results from a competitor, Cloudflare, which grew revenue 51% year over year during the same period. Fastly did not continue to execute as I thought they would. I've soured on that a little bit, I am not selling my shares yet.
Folks who follow the Motley Fool boards and Twitter will probably know Muji, and Muji is somebody who works in the space and who reached out to me privately and said, I think you should be more interested in Cloudflare than you should in Fastly, and knows more than I do, which was actually what caused me to invest in Cloudflare after I looked at it.
The bottom line here is I'm a little bit sour on Fastly, not selling my shares, I usually try to hold for three to five years. But so far, it looks like the investing thesis is not playing out the way that I had intended.
