In a market that has roared off March lows, and with growth stocks leading the way, Fastly (NYSE:FSLY) in one sense seems like an outlier. Back in October, FSLY stock plunged 27% in a single session after lowering its outlook for the third quarter. The stock actually has fallen a tiny bit further since.
It’s the kind of move we haven’t seen much of over the past nine months, let alone during a third quarter earnings season that looked rather strong.
But it’s worth taking a step back and putting that one-day sell-off in context. The plunge followed a big rally in FSLY stock. And the driver of the plunge seems like a relatively one-time, and potentially fixable, problem.
The perception caused by the guidance cut still seems to color the Fastly story. That will change. Investor attention will turn from the disappointment of the guidance cut to the opportunities ahead of Fastly. And when it does, FSLY stock has a nice path back to all-time highs.
The October Plunge
When a stock drops 27% in a single session, it’s hardly good news. But the news is not nearly as bad as the headlines suggested, for three reasons.
First, FSLY stock had been roaring before the updated outlook was released. Even including the 27% fall, FSLY still gained over the previous month. There was certainly a “too far, too fast” to the trading before the release, which accentuated the decline. Had the market been a little more cautious, the post-earnings fall wouldn’t have been so pronounced, and the lowered outlook wouldn’t seem like such a stumble.
Second, Fastly’s guidance cut wasn’t that substantial in context. The company originally guided for revenue of $73.5 million to $75.5 million, before lowering the outlook about $4 million at the midpoint of the respective ranges.
It’s too simplistic to argue that a $4 million reduction in a single quarter shouldn’t result in a roughly $3.4 billion reduction in market value. FSLY is a growth stock after all, and slowing near-term growth usually means reduced expectations for the long term.
But that gets to the third reason why the quarter wasn’t as disastrous as the stock price indicated. The cut doesn’t actually reflect reduced long-term expectations. Rather, Bytedance, the owner of the popular TikTok app, pulled its traffic from the Fastly platform.
Bytedance didn’t make that move because Fastly was failing. It made that move because the Trump Administration was moving to ban TikTok. Bytedance believed that Fastly would have to sever ties, and so it moved first. Like an employee quitting before he’s fired, Bytedance wanted to keep control — and maybe save a little face.
The Long-Term Case for FSLY Stock
The guidance cut simply isn’t as big a deal as it seems. And if an investor adjusts for that fact, the bull case becomes apparent relatively quickly.
This still is a company with a massive growth opportunity. Multiple “megatrends” will drive that growth.
Fastly is a leader in “edge computing.” Edge computing reduces latency, or the time it takes to deliver data to end users. It’s of use to online gambling providers for real-time betting, networked gaming, and streaming video operators.
Those are all industries that themselves are likely to post impressive growth. Gaming and online gambling, in particular, have been two of the hottest sectors of 2020 — and with good reason.
Those providers will drive more demand for edge computing. Put simply, Fastly sits where the Internet is going.
That case drove plenty of optimism before October. Two days before the guidance cut, FSLY stock closed at an all-time high. At that point, the stock had rallied 542% year-to-date.
That case remains intact. So does the chart. Again, the 27% plunge sounds disheartening, but it came after a monster short-term rally. Remove that peak from the chart, and FSLY simply looks like it’s spent a few months consolidating, a pattern that often leads to another rally. Meanwhile, Fastly stock still has more than quadrupled so far this year.
The short version of all this is: Fastly is fine. TikTok revenue may well return, given the currently unclear nature of the ban and the pending change in the White House. Takeover rumors are rampant — and those rumors get quickly dismissed if the rumored target isn’t worth buying.
Fastly is worth buying, even if a takeover doesn’t arrive. One minor stumble in a single quarter doesn’t change that fact. As the memory of the October headlines recede, the focus on the long-term case will return. And the rally will resume.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.