Will Fastly continue its bull-run even after TikTok ban?

Author: Finscreener

Estimated read time: 4 minutes

Publication date: 24th Aug 2020 11:07 GMT+1


Fastly (NYSE: FSLY) is one of the leaders in Edge Computing, and has experienced a bull run since March 2020. After trading range-bound for the first three months of this year, the stock has gained 650% since touching a record low in March 2020, easily outpacing gains of the S&P 500 and NASDAQ.

After its second quarter results on August 5, the stock also touched an all-time high of $116.18. In fact, Fastly has become one of the top-performing stocks of 2020.

Fastly aims to revolutionize the internet content delivery network. According to DataCenterNews, Fastly can “better monitor application performance” and solve problems that arise more easily. 

The company helps enterprises to enhance the speed of their internet traffic through its hi-tech content delivery network (CDN). Fastly is able to ensure this speed and on-time delivery of enterprise data due to the strategic positioning of its data centres.

 

Loyal customer base and robust financials underpin its growth

One of the unique propositions of this company is that its network management is extremely developer-friendly. Some of its leading customer includes Shopify (NYSE: SHOP), Spotify (NYSE: SPOT), The New York Times, Slack (NYSE: WORK) and Wayfair. According to the financials, Fastly boasts of a customer retention rate of roughly 130%. In fact, the stock’s latest uptick was also due to the strong result posted by its key customer Shopify. 

Contrary to the speculations that the COVID-19 induced lockdown would cause small and medium enterprises to slash their IT spending, Fastly posted a 38% Year-on-year (YoY) growth in its revenue.

The growth of enterprise customers stood at 22% YoY and led the company to lower its non-GAAP loss by 80%. These numbers put the doubts to rest that the coronavirus crisis would shrink enterprise IT expenditure.

In its most recent quarter, Fastly posted a 62% YoY growth in its Q2 revenue that rose to $75 million, exceeding analyst expectations of $71.4 million. This was the company’s biggest quarterly rise since its IPO in May 2019. The expansion in its business has also paved the path for its profitability.

The company’s earnings per share came in at $0.02, above analyst estimates of a net loss of -$0.01. Encouraged by the upbeat performance, Fastly has boosted its full-year revenue outlook to $290 million to $300 million, compared to $280 million to $290 million.

 

Challenges mount amid talks of TikTok ban

As Fastly relies on few of the significant customers for its business, it could also make things challenging for the edge-computing company. Chinese short-video app, TikTok, has become one of its major customer and accounts for 12% of its sales.

Therefore, Trump Administration’s recent crackdown on TikTok has made investors jittery and the stock plunged 33% since Aug. 4.

Amid the growing tensions between the U.S. and China, President Donald Trump has indicated his intentions to ban TikTok in the country. Addressing the issue, Joshua Bixby, Fastly’s CEO, stated in the earnings call, "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."

 

Innate strength in business makes it a strong bet

Even as concerns over the impact of TikTok’s ban on Fastly revenue is justified, exaggerating it doesn’t make sense. Fastly has outperformed the market and investors need to look at it from a long-term perspective.

The company with its disruptive technologies invests heavily in innovation and it will create concrete revenue streams in the future. The company has mentioned that it is extremely upbeat about its security technologies.

Moreover, Fastly caters to TikTok outside the US and will continue to earn revenue from it even if its banned in the country. Also, prospects of Microsoft purchasing TikTok before September 15 could save the situation for Fastly.

Irrespective of its relationship with TikTok, the company is poised to grow based on its superior offerings. The stock does look expensive in terms of the forward price-sales ratio of 28 as compared to its peers. Hence, for long-term investors, Fastly does offer considerable room for growth, however with some degree of volatility.


Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.com. The observations he makes are his own and are not intended as investment or trading advice.