Is this a good time for investors to buy into this growth stock after a third of Fastly’s market value has been erased? I think so – and here are three reasons why.
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But first, here’s a look at what turned the stock down.
Understand Fastly’s revised Q3 outlook
Last week, Fastly announced that sales for the period ended September 30th are estimated at $ 70 million to $ 71 million. That was well below the company’s original forecast for sales between $ 73.5 million and $ 75.5 million.
The company cited two main reasons for the unexpectedly poor sales. First, usage by Fastly’s largest customers (ByteDance – owner of TikTok) has not been as good as expected due to the customer’s “uncertain geopolitical environment,” Fastly said in its press release. Second, some additional customers were less busy than expected at the end of the quarter.
Unsurprisingly, Fastly Stock was so sensitive to this news. Stocks were up more than 500% since the start of the year. Expectations were high to say the least. Even after that sell-off, the stock is still up more than 300% this year.
Why isn’t that a red flag? Why should investors be opportunistic and consider buying the stock after it has sold off?
1. Put yourself in the shoes of management
Investors should be aware that in these uncertain times, it is likely to be incredibly difficult to forecast sales – especially for a company whose sales are driven by how customers use the platform.
Unlike many of Fastly’s other software peers, the company doesn’t have a predictable source of revenue for fixed-price software subscriptions. Instead, Fastly acts as an IaaS (Infrastructure-as-a-Service) business model, with revenue moving in the same direction as overall usage on its platform. This less predictable business model is likely to result in significant discrepancies in revenue from a forecast in uncertain times. Of course, this can sometimes work in favor of the company (if usage is much higher than expected).
2. Remain generally strong quickly
In Fastly’s October 14th update of preliminary third quarter sales, Joshua Bixby, Fastly CEO, went out of his way to ensure investors that the company’s underlying business remains healthy: “While our third quarter preliminary results meet the challenges We believe that the fundamentals of Fastly’s business continue to be strong, as does the demand for our platform. ”
In fact, Fastly’s preliminary sales margin is forecasting sales growth of around 42% year over year. The edge computing specialist is not only doing well, he is also thriving.
3. Stocks are significantly cheaper than they were
This last point is probably the most important: investors can buy stocks today at a much lower price than they did a few weeks ago. Unfortunately, this is possibly the strongest reason many investors have doubts about how they feel about Fastly.
As a shareholder, a severe sell-off is hard to bear. Often times, it’s as difficult to buy a stock as it is falling. For example, investors might think about whether stocks will continue to fall. A 33% discount on the stock, however, can more than make up for a quarter of the unexpectedly poor sales – especially if it’s a company that is still growing extremely fast.
Investors now have another chance to buy Fastly stock with a market cap below $ 10 billion – not bad deal for a disruptor in the fast-growing edge computing space.
Sure, this is not the bargain area. Fastly Stock saw during the coronavirus market crash earlier this year. However, if you want to wait until Fastly stock looks like a bargain before investing, you can wait awhile. With a business model with recurring income, huge market opportunity, and rising revenues, stocks may not get much cheaper.
Does this mean the stock won’t go down from here? Expect volatility in a growth stock like this. However, for investors buying stocks today and holding them for five years or more, I believe that at some point we will look back and find this a good entry point into a great company.
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