Is Fastly Stock Overvalued?

The need for speedy Zoom meetings, virtual collaboration, and other tools made internet infrastructure a top priority for many businesses. Fastly Inc (NYSE:FSLY) provides edge cloud computing software development kits (SDK), security, managed content delivery networks (CDN), and more.

From its March lows, FSLY share price more than quintupled and that has analysts worried, is Fastly stock overvalued?

A return to normalcy is inevitable, but so is the evolution of technology. The offline to online trend is not slowing. Both work and play are going online, and even schools need virtual tools: 86 percent of states increased internet speeds during the COVID-19 crisis.

All that migration demands a lot of internet bandwidth. Two major bandwidth users are Netflix (NFLX) and YouTube, which stream 4K video. It takes a lot of bandwidth to stream and even more to produce these videos.

Fastly has taken advantage of the trend: its revenue increased with a $775 million acquisition of Signal Sciences in August. This sparked murmurs of Fastly itself possibly being acquired by Cisco (NASDAQ:CSCO).

With a vaccine on its way to the general public, let’s check Fastly’s data to see if it’s share price has run past its fair market valuation.

Why Fastly Stock Went Up

The worldwide crisis was a boon for Fastly’s business. It works in a B2B niche at the foundation of the internet, with rivals like Cloudflare (NET), Amazon (AMZN), Microsoft (MSFT), and Akamai (AKAM).

The company’s focus on fast, secure, reliable cloud infrastructure launched its stock price from the $20 range to circle $100 per share by year end.

Share prices climbed at several distinct points – each quarterly earnings gave investors ever more hope in the company. And each acquisition announcement sent the stock soaring too.

Fastly share price was volatile throughout the year, ranging from as low as $10.63 at the onset of the market crash to $136.50 per share at its October peak.

However, it got pummeled in the run-up to the election as uncertainty surrounded the country’s economic recovery. After bottoming out in the low $60 range by Halloween, the stock slowly climbed back up toward $100 by the holidays.

Its continued success hinges on several factors, but the company’s financials need to be examined before discussing those.

Fastly Financials Reveal Negative Earnings

Fastly maintained its eight figure market capitalization throughout the second half of the calendar year, based on strong earnings reports.

The San Francisco-based company reported $71 million in revenue for the third quarter of 2020, which is up 42 percent from the same quarter in 2019. Average enterprise customer spend also increased from $716,000 in Q2 2020 to $753,000 in Q3.

The company’s GAAP-adjusted gross margin was 58.5 percent for the quarter. In spite of this, it reported an operating loss of $23 million, versus a $13 million operating loss in Q3 2019. It also had capital expenditures of $14 million.

Fastly continues growing its total customer count, with 2,047 enterprise customers reported in the third quarter of 2020. If it can continue expanding its footprint in ecommerce, media, and high-tech markets, the company’s valuation could be spot on.

Bearish investors have reservations about its ability to continue top-line growth though.

Is Fastly Valuation Too High?

The biggest problem Fastly experienced in 2020 is its relationship with TikTok. Although one of the fastest-growing social networks on the planet, the White House banned TikTok in the U.S. in September 2020. A federal judge halted the ban in December, but Fastly’s future growth potential remained in jeopardy.

BtyeDance, TikTok’s parent company, is headquartered in Beijing, China. This put the company and app at the center of the escalating U.S.-China trade war in 2020. Although Fastly continues to grow its customer base, none are larger than TikTok.

This government regulation bottlenecked Fastly’s growth, as it had to make up for the 20 percent loss of its biggest customer as the app was banned. Court intervention and a changing White House administration may clear the skies for TikTok though.

That means that Fastly could show big numbers in 2021 that not only justify its current valuation but also push it even higher. Of course, that doesn’t mean the company’s stock is out of the woods yet.

Will Fastly Stock Drop?

Each time Fastly stock fell, good news was announced. Whether positively received earnings or good news on the legal front, FSLY stock price had  knack for bouncing back each time. That’s what investors like to see: a share price that is resilient in the face of negative news.

Smaller companies also proved to have unstable valuations throughout 2020. Both Zoom (ZM) and Fastly hit highs they couldn’t sustain during the year’s uncertain market conditions. A lack of government stimulus in December stalled November’s market growth.

Fastly could drop with the rest of the markets quite easily. Both the S&P 500 and Dow Jones Industrial Average were relatively stale in December. Although vaccines are on the way, it’s unclear how fast they could effectively quell the pandemic. Social distancing rules were re-implemented around the globe to brace for a cold winter.

This pandemic could freeze stock prices through the winter, which includes markets reopening in January 2021. With so many industries to look after, tech stocks could flounder next year. Retail, hospitality, and other industries have more desperate need, and their growth could potentially overtake tech, especially those that don’t have consumer name recognition.

Is Fastly Stock Overvalued? The Bottom Line

Fastly’s stock hit an all-time high market capitalization during 2020, however it couldn’t maintain that value and quickly deflated when President Trump put TikTok in the crosshairs of his trade war with China.

Despite the problems, Fastly managed a major acquisition and rumors swirled by year end of Cisco purchasing the company. This could put both companies in the right place to survive another market downturn.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.