Share of enterprise facing cloud platform Fastly (NYSE: FSLY) are trading at $84.6 at the time of writing, and have fallen over 30% in the last week. Fastly is a high-growth content delivery network provider and gained over 500% in 2020 prior to its sell-off on October 14, easily crushing returns of the S&P 500.
The company announced its preliminary Q3 results and confirmed its revenue will be lower than its prior guidance. This lower than expected sales was primarily due to TikTok, its biggest customer that accounted for 12% of total sales in the first half of 2020. Further, Fastly also withdrew its guidance for 2020 that exacerbated the sell-off.
Fastly expects to post Q3 sales between $70 million and $71 million, below its prior guidance of sales between $73.5 million and $75.5 million. Analysts expected the company to post sales of $74.8 million in the September quarter.
The Trump administration has come down heavily on TikTok and other Chinese applications which has hurt Fastly sales in the third quarter. Fastly also claimed the company experienced lower usage by a few customers in the second half of Q3 which again impacted its top-line.
According to Fastly, as economies reopened, the demand for internet connectivity has stabilized and the company’s CEO Josh Bixby said, “The current global environment has in some ways fueled our business, but has also created areas of uncertainty. While our preliminary third-quarter results reflect the challenges of a usage-based model, we believe the fundamentals of Fastly's business remain strong, as does demand for our platform."
Why did Fastly stock correct significantly?
Even after Fastly’s lower guidance for Q3, the company’s year-over-year growth stands at between 40.6% and 42.6%, indicating its growth story remains intact. However, Fastly stock was trading at a hefty valuation prior to the sell-off.
The stock is valued at a market cap of $9.45 billion indicating a forward price to sales multiple of 32x. This means its price to sales ratio was closer to 50x last week. Comparatively the price to sales multiple for peer company Akamai is lower than 6x.
So, while Fastly is a high growth stock, its sky-high valuation indicates the company needs to consistently outpace Wall Street estimates to be sustainable. Any negative news surrounding the company will result in a massive price correction as the one witnessed last week.
Fastly continues to report a non-GAAP loss, though it is expected to report an adjusted net profit in 2021. The recent price decline can be viewed as a buying opportunity as Fastly is forecast to grow sales by 47% to $295 million in 2020 and by 33% to $393 million in 2021.
Analysts lower price target on Fastly stock
Shortly after Fastly withdrew its guidance for 2020, several Wall Street analysts lowered the stock’s 12-month price target, according to multiple reports from The Fly.
- Craig-Hallum reduced the stock’s price target from $100 to $85 and a reiterated a “Hold” rating
- DA Davidson lowered the stock’s price target from $115 to $105 and reiterated a “Buy” rating
- Credit Suisse lowered the stock’s price target from $110 to $100 and reiterated an “Outperform” rating
- William Power lowered the stock’s price target from $1o5 to $85 and downgraded Fastly from “Outperform” to “Neutral”
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