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Fastly Stock: Overvalued, Lacking Momentum
Stock Analysis & Ideas

Fastly Stock: Overvalued, Lacking Momentum

Fastly (FSLY) is a content delivery network. The company operates an edge-could platform to help developers expand on their core cloud infrastructures.

I am bearish on the stock. (See Analysts’ Top Stocks on TipRanks)

Q3 Earnings Beat

Fastly unexpectedly beat its third-quarter earnings estimates earlier this month. The company beat its revenue target by $3.26 million and its EPS target by $0.07.

The key drivers behind the impressive quarter were an increase in corporate customer count by 5.39% quarter-over-quarter, a quarter-over-quarter increase of 6.47% in total customer count, and the net retention rate moving up to 112%, from 93% in Q2.

Although Fastly did produce year-over-year revenue growth of 23%, its operating margin declined to 52.8% versus 58.5% a year ago. In addition, operating losses have also widened to $55 million from $23 million in Q3 2020, translating into a net EPS loss widening of $0.26 in the same period.

Fastly remains upbeat on its future sales numbers and expects revenue to hit a range of $90 million to $93 million for the quarter. The company’s management also anticipates net losses to be reduced to $0.16-$0.19 per share in the year’s final quarter.

Price Is Overcooked

Although the company recently beat its earnings estimates, the stock price is trading at an unreasonable price. The company’s price-to-sales ratio is 14.8x, and this is very concerning considering the company is cash-flow negative as well.

There also aren’t signs that Fastly has gained significant momentum after beating earnings estimates on November 3, as the stock has traded down by an additional 23.6% since then, and remains below its 10-, 50-, 100-, and 200-day moving averages.

Systemic Headwinds

There’s more bad news for Fastly investors. Since listing on the New York Stock Exchange in May 2019, the stock has held a positive correlation of 0.2 with the 10-year U.S. Treasury bond, meaning that it’s had a negative correlation with the bond yield.

It’s much anticipated that we’ll see a surge in the long-term bond yields due to interest rate hikes, which could pour even more downward pressure on growth stocks such as Fastly.

In addition to the correlation effect, investors are already pricing in a higher interest rate environment, which shifts up discount rates on companies’ cash flows. This spells terrible news for Fastly as its forecasted future cash flows may drop to a linear growth trend instead of an exponential growth pattern, subsequently awaking pressure from an asset pricing perspective.

Wall Street’s Take

Wall Street remains cautious on Fastly stock and thinks it’s a Hold. Out of the three ratings assigned on Wall Street, the average Fastly price target is $52.50, worth 29% in upside.

Concluding Thoughts

Although Fastly has made year-over-year progress, it’s likely not the correct time to be bullish on the stock. Key valuation metrics suggest that the stock was overbought in 2020, and the sharp decline in the stock price we’ve experienced in 2021 is well justified. As we head into a higher interest rate environment, we’ll likely see further a drawdown.

Disclosure: At the time of publication, Steve Gray Booyens did not have a position in any of the securities mentioned in this article.

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