Fastly Inc: Recent Sell-Off Overblown; Wall Street Sees 77% Upside

Fastly Stock Down 45% in 2021 But Outlook Is Solid

Investors are a fickle bunch and prone to overreacting (on both ends of the spectrum).

If a company reports weak financial results, but its loss wasn’t as big as expected, investors tend to reward it. If that same company reports double-digit revenue growth, but it came in slightly below expectations, its stock tends to take a beating. That’s what happened with Fastly Inc (NYSE:FSLY).

A cloud-computing services provider, Fastly Inc was one of the best-performing work-from-home companies during the coronavirus pandemic. In 2020, Fastly stock advanced by an impressive 316%. From its March 2020 lows until the end of the year, FSLY stock soared by 721%.

As consumers and businesses adjusted to the pandemic-related quarantines and shutdowns, Fastly stock enjoyed serious tailwinds from increased traffic on the company’s networks from online gamers, content providers, and retailers.

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That optimism carried into 2021 but was derailed in February on growing concerns about inflation and rising interest rates. That fear hobbled most tech stocks. From March to May, FSLY stock traded sideways, with support near $65.00.

That support was breached in early May, when the company allegedly reported “disappointing” financial results and “downbeat” guidance. After announcing its first-quarter financial results, the villagers ran for the hills on concerns that the company’s financial growth might be slowing as the economy begins to open up.

On May 6, Fastly stock plunged by as much as 28% to $41.41. That low represented a 65% drop from the previous two months.

It seems that the sell-off was a little overblown. As you can see in the below chart, investors have stepped back in after Fastly shares bottomed in early May. In a recent period of 11 trading days, FSLY stock rallied by 15%.

As of this writing, the stock is changing hands at $48.25.

Chart courtesy of StockCharts.com

Solid First-Quarter Results

After the markets closed on May 5, Fastly announced that its revenue for the first quarter of 2021 (ended March 31) increased by 35% year-over-year to $85.0 million. This was pretty much in line with the $85.1 million Wall Street was looking for. (Source: “Shareholder Letter: Q1 2020,” Fastly Inc, May 5, 2021.)

The company reported an operating loss of $50.0 million, compared to a first-quarter 2020 operating loss of $12.0 million. Its first-quarter 2021 adjusted operating loss was $13.0 million, versus an adjusted first-quarter 2020 operating loss of $6.0 million.

Fastly reported a first-quarter net loss of $51.0 million ($0.44 loss per share), versus a first-quarter 2020 net loss of $12.0 million ($0.13 loss per share). It reported an adjusted net loss of $0.12, compared to an adjusted net loss of $0.06 in the same prior-year period. That’s not far off from Wall Street’s projections of an adjusted net loss of $0.11.

During the quarter, the company’s total customer count increased by more than five percent sequentially from 2,364 to 2,500. The average enterprise customer spend increased sequentially from $782,000 to $800,000.

During the first quarter, the company reached 130 terabytes per second of global edge network capacity. Also during the quarter, the company entered two new markets: Phoenix, AZ and Portland, OR. That gives the company a presence in 58 global markets.

Business Outlook

For the second quarter of 2021, Fastly expects to report:

  • Total revenue between $84.0 and $87.0 million, which is lower than Wall Street’s forecast of $91.0 million
  • An adjusted operating loss between $18.0 and $22.0 million
  • An adjusted net loss between $0.16 and $0.19 per share, which is higher than Wall Street’s forecast of a loss of $0.09 per share

For fiscal 2021, Fastly’s management:

  • Boosted their total revenue forecast to the range of $380.0 to $390.0 million, up from previous guidance of $375.0 to $385.0 million
  • Maintained their adjusted-operating-loss forecast in the range of $40.0 to $50.0 million
  • Kept their adjusted-net-loss-per-share forecast in the range of $0.35 to $0.44

While Fastly’s second-quarter outlook may have underwhelmed Wall Street and investors, the company still boosted its full-year guidance—not that investors cared at the time.

Wall Street is still bullish on the company’s long-term outlook, though. Of the nine analysts providing a 12-month share-price forecast, their median target is $55.00, which points to additional 14.5% upside. Their high estimate is $85.00, which suggests a 77% run from the current level.

Analyst Take

Fastly Inc was one of the best-performing cloud-computing services provider stocks of 2020.

With the economy reopening, some investors think Fastly’s growth will slow down. That didn’t happen in the first quarter, however, with the company reporting double-digit revenue growth. Management also increased their full-year guidance.

The shine may have come off Fastly stock, but its rebounding share price suggests that investors see much better days ahead.