There are some bullish price targets on the Street. But one analyst's price target for edge-computing company Fastly's (FSLY 3.90%) stock is on the extreme side of bullishness. The recently updated 12-month price target calls for over 100% upside from here.
Could the growth stock really be this undervalued? Let's take a look.
NASDAQ: FSLY
Key Data Points
Fastly's fall from grace
To better understand Raymond James analyst Frank Louthan's $25 price target for Fastly stock, investors should have some context about the stock's recent volatile ride. Shares of the growth stock have been absolutely hammered this year, sliding nearly 70% year to date. The decline in Fastly's stock price has been largely driven by disappointment in the company's growth rates relative to its valuation. With Fastly still reporting significant losses, investors were likely hoping for a significant uptick in year-over-year revenue growth rates in 2022. But top-line year-over-year growth rates are still in the low twenties -- far from the company's 45% growth in 2020.
This fall from grace has left analysts, Louthan included, scrambling to update their models with more conservative assumptions. In February, the analyst lowered his price target on the stock from $42 to $35, noting that the stock's sharp drop following the release of its fourth-quarter results was an "overreaction." Earlier this month, the analyst cut $10 off the price target, lowering it to $25.
So investors should realize that while Louthan's 12-month price target for Fastly stock is far ahead of where shares are trading today, it's 40% lower than the firm's price target for the stock earlier this year. With so much volatility in the price target, it's difficult to take it seriously.
Tread carefully
In Louthan's most recent notes on the stock, he reminded investors that Fastly did report second-quarter revenue above the high end of management's quarterly revenue guidance range for the period. Further, the analyst thinks that the company's slight increase to its full-year guidance and its recent move to hire a new CEO are good news.
But there are still some major hurdles Fastly needs to overcome.
First and foremost, the company needs to prove that it can become profitable. And on that front, Fastly doesn't even seem close. Fastly's GAAP (generally accepted accounting principles) and non-GAAP losses both worsened during Q2 compared to the year-ago quarter, coming in at about $69 million and $27 million, respectively. This compared to GAAP and non-GAAP losses of approximately $57 million and $18 million in the year-ago period, respectively.
And this brings us to the second major concern for Fastly. Assuming the company can begin to demonstrate some operating leverage as revenue grows, Fastly is likely going to need faster revenue growth rates than it is currently demonstrating to rapidly dig its way out of its significant losses.
All of this to say, investors should tread carefully when it comes to analyst price targets. Just because one analyst expects over a 100% upside for a stock doesn't mean it's in the bag. Many Fastly analysts' recent changes to their price targets seem to be chasing the stock. Further, there's significant fundamental risk to Fastly stock, even relative to its current valuation, due to the company's inability to become profitable so far.
