Fastly, Inc. (FSLY) is a real-time content delivery network (CDN) company. The company provides services in the areas of delivery, security, streaming media, e-commerce, and private CDN. With FSLY, users can manage traffic spikes and mitigate security threats. It operates an edge cloud platform for its primary business services and works with Alphabet’s (GOOG) Google Cloud Platform to extend infrastructure and application logic to its users.

Investors went into panic mode last month when the company announced it would miss its initial third-quarter revenue guidance. And finally, its quarterly results, reported last week, failed to impress the street. The company reported a top-line of $70.6 million. Though this implies a 42% increase year-over-year, management had initially guided for revenue during the period to be between $73.5 million and $75.5 million. This correction was primarily driven by “lower usage by a few customers” than what management estimated. As a result, a loss of $0.22 per share widened from the year-ago loss of $0.13 per share.

FSLY has immensely benefitted from the robust tech and cloud computing growth amid the pandemic as it specializes in edge computing, which speeds up content delivery. Consequently, the stock has gained 216.4% year-to-date. However, because of weak financials and several other factors, FSLY has a “Sell” rating in our proprietary rating system.

Here is how our proprietary POWR Ratings system evaluates FSLY:

Trade Grade: F

FSLY is currently trading below its 50-day moving average of $90.23 but above its 200-day moving average of $55.67, indicating that the stock is neither in an uptrend nor in a downtrend. However, the stock’s 33.4% loss over the past month reflects a solid short-term bearishness.

FSLY witnessed accelerated growth in enterprise customers during the third quarter. Total customer count increased to 2,047 up from 1,951 in the year-ago quarter. However, lower-than-expected usage from its largest customer TikTok, owner ByteDance, was the headwind for the quarter. Though the company believes that there’s a possibility that some of the ByteDance usages which its platform lost could return, investors should not count on it right now.

In the third-quarter letter to shareholders, CEO Joshua Bixby mentioned, “Any ban of the TikTok app by the US would create uncertainty around our ability to support this customer. While we believe we are in a position to backfill the majority of this traffic in case they are no longer able to operate in the US, the loss of this customer’s traffic would have an impact on our business.”

Buy & Hold Grade: F

In terms of proximity to its 52-week high, which is a key factor that our Buy & Hold Grade takes into account, FSLY is positioned unfavorably. The stock is currently trading 53.5% below its 52-week high of $136.50.

FSLY went public in May 2019, and the stock is up nearly 206% in the trailing twelve months. The company has grown its revenue at a CAGR of 46.5% in the same period. However, the company is still unprofitable and GAAP loss per share has consistently widened in each of the trailing four quarters.

FSLY is expanding into cybersecurity and recently acquired Signal Sciences for $825 million. The purchase consisted of $200 million in cash and the rest in FSLY stock. While FSLY wisely used its high-priced stock, it also had to use a fair amount of cash, which limits its future merger potentials. Furthermore, FSLY bought Signal at a premium of around 30 times Signal’s $28 million annualized sales run rate.

Overall POWR Rating: D (Sell)

Overall, FSLY is rated “Sell” due to its weak financials, widening losses, and short-term bearishness, as determined by our overall POWR Rating.

Bottom Line

The demand for fast and secure internet communication is growing at an accelerated pace, and FSLY appears to have gained traction with its modern platform despite being a new player in the edge computing and security space. However, the company is facing significant competition from larger players like Akamai Technologies (AKAM) which has the scale to deliver big profits as well as the financial flexibility to invest in new capabilities.

FSLY operates its CDN on a usage-based model. In other words, customers pay based on what they use. Web usage is still heading north, however, FSLY is losing business despite its steadily growing customer base and net expansion rate. The big sell-off dragged the stock down to a more reasonable price level but the stock could be attractive even at a lower price. The street expects next quarter EPS to decline 33.3% year-over-year.

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FSLY shares were trading at $64.92 per share on Monday afternoon, up $1.41 (+2.22%). Year-to-date, FSLY has gained 223.47%, versus a 3.75% rise in the benchmark S&P 500 index during the same period.

About the Author: Sidharath Gupta

Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...

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