Shares of edge computing company Fastly (FSLY 4.43%) got hammered on Thursday. The stock fell about 30% as the company's fourth revenue and its first-quarter guidance came in below expectations. With shares down so substantially, is now a good time for investors to consider buying this tech stock, or is the company's decelerating top-line growth and management's soft guidance a red flag that should keep investors on the sidelines?
To find out, let's examine a few key takeaways from Fastly's fourth-quarter update, including management expectations for the first quarter and the full year, and then wrap up by taking a look at the stock's valuation.
Slowing growth
Fastly reported fourth-quarter revenue growth of 15% year over year. This put total revenue for the period at $137.8 million, slightly below analysts' average forecast for fourth-quarter revenue of $139.5 million. But the top-line figure was just ahead of the low end of management's guidance range for the period. Management had forecast fourth-quarter revenue to be between $137 million and $141 million.
Even more worrisome than a top-line miss is the company's trend of slowing growth. Fastly's 15% growth rate was down from year-over-year growth rates of 20% and 18% in the second and third quarters of 2023, respectively.
But to the company's credit, things aren't decelerating on every metric. As management pointed out in the company's fourth-quarter earnings call, Fastly's "got-market, packaging and channel efforts through 2023 delivered an inflection in our customer acquisition as we closed out the year," Fastly CEO Todd Nightingale explained. Total customer count grew by 141 sequentially, and enterprise customers rose by 31 over this same period. This compares to an increase of 30 total customers sequentially in Q3 and a decrease of 4 enterprise customers during the quarter.
Despite this inflection point in customer growth, management is still guiding for an even slower revenue growth rate in Q1. The midpoint of management's guidance range calls for first-quarter year-over-year revenue growth of about 13.1%. But it's worth noting that the company's full-year guidance implies faster growth of 15.6%.
Shares still look expensive
With Fastly's top-line growth rate sitting squarely in the mid-teens, investors may have to demand more from the company regarding improvements in profitability to justify the stock's sky-high valuation. Unfortunately, Fastly is still reporting losses. It's net loss per share during Q4 was $0.18. On a full year basis, the company lost $1.03. But this bottom-line figure is moving in the right direction. Both of these loss per share figures are substantial improvements compared to what the company was reporting in the respective year-ago periods. Fastly's full-year 2022 loss per share, for instance, was $1.57.
Ultimately, however, the company's top-line growth and its bottom-line performance are still hardly good enough to justify the stock's more than $2.1 billion market capitalization. The smart decision here may be for investors to patiently wait to see if the stock eventually sells off even more substantially, providing a more attractive entry point into the stock.
