Real-time content delivery network (CDN) company Fastly, Inc. (FSLY), which is based in San Francisco, operates an edge cloud platform that empowers developers to run, secure, and deliver websites and applications globally. The company announced on October 27 that it was named a Leader in The Forrester New Wave: Edge Development Platforms, Q4 2021 report. However, the stock has declined 20.8% in price over the past month and 54.9% year-to-date to close yesterday’s trading session at $39.45.
The stock is currently hovering near its 52-week low of $33.55, which it hit on December 6, 2021.
FSLY’s CFO Ron Kisling made a large insider stock sale on October 18, selling 5,088 shares. And lately, hedge funds’ interest has declined in the stock. Moreover, the company remained unprofitable in the third quarter. So, FSLY’s near-term prospects look bleak.
Here is what could influence FSLY’s performance in the near term:
Questionable Business Practices
A few of FSLY’s top customers paused their use of the platform in the second quarter following its internet outage in June 2021, which affected several high-traffic sites, including The New York Times, Reddit, and Amazon.com, Inc. (AMZN). The company’s CEO, Joshua Bixby, announced in a shareholder letter published on Nov. 3 that FSLY’s customers had returned. However, the event dealt a severe blow to the company’s reputation.
Furthermore, earlier this year, several law firms launched investigations into FSLY concerning possible violations of the Securities Exchange Act of 1934. The company is alleged to have failed to disclose that its revenue growth was driven by its single largest customer, China-based ByteDance, the operator of TikTok, which was under threat of shut down in the United States.
Top Line Growth Does Not Translate into Bottom Line Improvement
For the third quarter, ended September 30, 2021, FSLY’s revenue surged 22.8% year-over-year to $86.74 million, driven by the company’s acquisition of Signal Sciences and the adoption of its modern edge platform and products. However, its non-GAAP operating loss increased 211.4% year-over-year to $12.94 million.
While FSLY’s non-GAAP net loss came in at $13.23 million, up 195.5% year-over-year, its non-GAAP loss per share increased 175% year-over-year to $0.11. In addition, its adjusted EBITDA was negative $5.45 million, compared to $813,000 in income in the year-ago period.
In terms of trailing-12-month net income margin, FSLY’s negative 62.16% is lower than the 6.42% industry average. And the stock’s negative trailing-12-month EBITDA margin compares to the 14.60% industry average. Moreover, its trailing-12-month ROCE, ROTC, and ROTA are negative compared to the 8.37%, 4.93%, and 3.62% respective industry averages.
POWR Ratings Reflect Bleak Outlook
FSLY has an F overall, which equates to a Strong Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. FSLY has a D grade for Stability, consistent with its 1.29 beta.
The stock has a D grade for Sentiment. This is in sync with analysts’ expectations that its EPS will decline 200% in fiscal 2021 and remain negative this year and next year.
FSLY has a D grade for Value, which is consistent with its forward EV/S and P/S of 12.01x and 12.68x, respectively, which are higher than the 4.03x and 3.97x industry averages. Also, it has an F grade for Quality, which is in sync with its lower-than-industry profitability ratios.
FSLY’s shares surged on November 4 because the company posted a nearly 23% revenue growth in the third quarter, but its shares have since declined in price. In addition, according to the guidance provided by the company, it is expected to report losses in the fourth quarter and in its fiscal year 2021. Its non-GAAP operating loss is likely to be between $18 – $15 million in the fourth quarter and $63 – $60 million in the current year. So, we think the stock is best avoided now.
How Does Fastly (FSLY) Stack Up Against its Peers?
While FSLY has an overall POWR Rating of F, one you might want to consider taking a look at its A-rated (Strong Buy) industry peers: Commvault Systems, Inc. (CVLT), Open Text Corporation (OTEX), and Magic Software Enterprises (MGIC).
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FSLY shares rose $0.05 (+0.13%) in premarket trading Wednesday. Year-to-date, FSLY has declined -54.85%, versus a 26.47% rise in the benchmark S&P 500 index during the same period.
About the Author: Manisha Chatterjee
Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst. More...
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