Fastly shares fall to all-time low of $5.52: Is it time to buy?

Fastly Inc. (NYSE: FSLY) experienced a significant downturn this week, with its stock price falling to an all-time low of $5.52 and closing down 14.33% on Thursday.

This drop followed a series of events beginning with the company's Q2 earnings report released post-market on Wednesday, where Fastly announced a 5% cut to its full-year 2024 revenue guidance. The adjusted forecast now ranges between $530 million and $540 million.

Analysts react to Fastly's revised guidance

Analysts, like Piper Sandler's James Fish, reacted by downgrading Fastly from 'Overweight' to 'Neutral' and slashing the price target from $10 to $6, citing demand issues primarily with its largest customers who are on utility-type contracts.

The revised guidance and the subsequent stock price fall were heavily influenced by reduced demand forecasts from Fastly’s major clients. In his note, Fish highlighted concerns about Fastly's future revenue prospects, leading to the downgrade.

Fastly reported a Q2 revenue of $132.37 million, a 7.8% increase year-over-year, slightly beating the expectations by $0.85 million.

However, despite this growth, the company faced a GAAP net loss of $43.7 million, deepening from a loss of $10.7 million in the same quarter the previous year.

Challenges for Fastly

The earnings details revealed more than just financial figures; they painted a picture of a company grappling with significant market and operational challenges.

Notably, Fastly’s Last Twelve Months Net Retention Rate (LTM NRR) decreased, highlighting issues in customer retention and possibly signaling reduced future revenues from existing customers.

Fastly struggles with not only demand softening but also increased competition in the content delivery network sector.

The company's heavy reliance on a small number of large media companies exacerbates its vulnerability to pricing pressures and shifts in spending patterns.

Despite some successes outside its largest customer base, Fastly’s expansion into security and computing has not yet counterbalanced these challenges effectively.

In response to these challenges, Fastly CEO Todd Nightingale outlined the company's strategy to mitigate these demand challenges. In Q2, Fastly pushed forward with its customer acquisition efforts, notably achieving a 4% sequential growth in Enterprise customer count.

Moreover, Fastly introduced the Fastly AI Accelerator in beta, aimed at enhancing the performance of ChatGPT-powered applications and reducing operational costs. This move signifies Fastly’s pivot towards leveraging AI to diversify and strengthen its service offerings.

Workforce reduction as a cost alignment measure

Adding to its slew of challenges, Fastly also announced an 11% reduction in its global workforce. This decision is expected to incur a charge of approximately $9.5 million to $10 million, primarily related to severance and related costs, aiming for completion by the end of 2024.

Despite the troubling short-term indicators, Fastly is making concerted efforts to pivot its strategy. This includes enhanced investment in security and compute services, which are expected to provide cross-selling opportunities and potentially stabilize revenue streams.

However, the effectiveness of these strategic shifts remains to be seen, particularly as they occur against a backdrop of broader market challenges and internal restructuring.

As Fastly navigates through these tumultuous times, the fundamental question for investors is whether the current low stock price represents a buying opportunity or a potential value trap.

To answer that let’s delve deeper into what the charts have to say about Fastly’s price trajectory, and explore whether the technical indicators align with the fundamental analysis presented.

A short-term bounce-back play?

Fastly shares have remained in a prolonged downtrend since late 2020 that has seen them crashing from above $130 to yesterday’s low at $5.52. Although the stock can experience further downside, one interesting thing to note about yesterday’s move is that the shares closed over 5% higher from where they opened at $5.58.

FSLY chart by TradingView
Considering that short-term traders who want to bet on a near-term bounce-back can take a long position in the stock near $5.85 with a strict stop loss at $5.50. However, investors must stay away from the stock until it can recapture its medium-term swing high above $8.46.

Traders who want to short the stock must wait for it to bounce back above $6 or fall below $5.52 to initiate fresh short positions.