FINANCE TODAY | ISSUE NO.16
Fastly is a content delivery network (CDN) that serves as an internet intermediary to increase the efficiency of the transmission of online content. The goal of the company is to optimize the speed, security, and scale of sharing content online. This is achieved by caching (storing) copies of online content at intermediary locations on a temporary basis, allowing end users to receive content at a faster, more secure rate. Fastly is already used by many large companies such as Twitter, Slack, and Amazon. The company’s large customer base was a pivotal reason as to why the stock rallied even during the height of the COVID-19 pandemic, and many analysts were surprised at the sudden drop earlier this week. Ticker symbol, FSLY, on the New York Stock Exchange, Fastly has a market cap of $10 billion USD and is one of the top five CDN companies on the market; revenue rose 39% in 2019 and grew 50% year-over-year to $137.6 million in the first half of 2020 (Stank, 2020). This dramatic growth was attributed to the surging use of online services during the COVID-19 pandemic as more people worked from home, streamed media services, and purchased items online. Fastly’s net retention rate, which gauges the company’s ability to retain and attract new customers, rose 130% in the first quarter of 2020 (Sun, 2020). Rising revenues and a strong customer base were catalysts that fuelled investor expectations, leading to an all-time high of $136.50 USD per share earlier this week. Of course, all good things must come to an end, and Fastly stocks fell over 30% following a shocking disruption.
This graphic illustrates Fastly’s services, acting as an intermediary to accelerate content and data retrieval between customers and businesses. Fastly’s services are indicated by the red clock.
TIK TOK STRUGGLE
Share prices fell from $123.18 USD to $87.99 USD following guidance issued by the company that earnings would underperform in the next quarter (Sun, 2020). This announcement came in the wake of Tik Tok’s uncertain fate in the U.S. as it was facing the possibility of being banned by President Trump. Tik Tok made up 12% of Fastly’s revenues in the third quarter, and the geopolitical uncertainty took a hit on predicted earnings and investor outlook (Stank, 2020). Some analysts say that the stock was overvalued regardless, and this pullback would create a good buying opportunity.
This graph shows how Fastly’s stock dipped dramatically in mid October.
POTENTIAL INVESTMENT OPPORTUNITY
Fastly is set to report its full third-quarter results on October 28th, which is bound to shed more light into the operations and financial health of the company. Until then, investors may find the dramatically decreased stock price to be an appealing buy, and it may well prove to reap many benefits. However, there are still many factors to consider before investing in Fastly. The long-term growth strategy still remains intact, providing the opportunity to bounce back eventually from this low. With no end in sight for e-commerce and app development, industry prospects also appear very positive. While this may seem tempting, the volatile nature of leading-edge technologies like CDN is a large risk to consider. Further unrest surrounding Tik Tok also has the potential to negatively impact Fastly. The early days following the drop off in price may be indicators of what is to come, where a keen eye will be needed to spot the fast changes in price.
Stank, K. (2020, October 15). Fastly is a buy if the stock continues to tank on revenue guidance cut, Cramer says. Retrieved from https://www.cnbc.com/2020/10/14/cramer-fastly-is-a-buy-if-the-stock-continues-to-tank-on-guidance-cut.html
Sun, L. (2020, October 12). Is Fastly Stock a Buy? Retrieved from https://www.fool.com/investing/2020/10/12/is-fastly-stock-a-buy/