Fastly stock price is down 96% from ATH: still overvalued

Fastly (NASDAQ: FSLY) stock price has become a fallen angel after dropping to a record low. It was trading at $5.67 on Monday, a big drop from its 2020 high of $136. This decline means that people who allocated $10,000 at its highest point in 2020 received 73 shares that are now valued at just $467.

Fastly is an important company

Despite its collapse, Fastly is still one of the most important companies globally. While most people have never heard about it, they have used its services indirectly. 

For example, you used its service if you have used platforms like Spotify, New York Times, Pinterest, Reddit, and Ticketmaster. These companies use its content delivery network (CDN) to ensure that their websites are safe and available globally seamlessly.

Fastly also offers other solutions to companies, including security, compute, and observatory. Its importance was seen on June 8 2021 when it went through a global outage that made it impossible for people to use popular services.

However, Fastly operates in a highly competitive industry that is now dominated by a company like Cloudflare, which has achieved a market cap of over $25 billion. It also competes with firms like Akamai Technologies, Amazon CloudFront, and even Microsoft.

This competition has contributed to the company’s current woes as its growth has stalled in the past few years. 

Fastly recent earnings

The most recent catalyst for the Fastly stock price was its recent financial earnings. The results showed that its total revenue rose by just 8% in the second quarter to $132 million. 

This growth was mostly because of Fastly’s network services whose revenues rose by 6% to $104 million and its security revenue whose business rose to $25 million. 

There are signs that demand for its solutions is not growing as the company added just 24 customers in the second quarter to 601. Net retention rate dropped from 114% to 110%. 

Most importantly, Fastly is still losing a lot of money as its net loss jumped to over $43.7 million during the second quarter. It had lost $10.7 million in the same quarter in 2023. 

Fastly expects that its business will continue slowing down. Its revenue is expected to come in at between $130 million and $134 million while the operating loss will be about $12 million. For the year, Fastly’s revenues will be between $530 million and $540 million. At the upper side of is guidance, Fastly’s revenue will be a $36 million increase from the previous year.

These numbers mean that the company is no longer seeing the strong growth it had a few years ago. For example, its revenue rose by over $64 million from 2020 and 2021. 

Fastly is still overvalued

The sharp decline of the Fastly stock price means that its valuation has tumbled to over $785 million, a sharp decline for a company that was valued at over $15 billion a few years ago. 

In most cases, a company that drops like this becomes highly undervalued. However, a closer look at Fastly shows that it is fairly overvalued. 

For a SaaS company like Fastly, the best approach is to look at the rule of 40, which looks at its growth compared with its margins. The most recent results showed that its revenue growth was about 8% while its net income margin was minus 31%.

The total stands at 23, meaning that the company is overvalued since the management is prioritizing growth than profits. The most ideal situation is where a company has a rule of 40 metric of 40 and above.

It is also worth noting that Fastly has significantly weak metrics than other companies in the industry. Cloudflare, its closest competitor, has a gross profit of 77% while Fastly has 54%. Similarly, Akamai Technologies has a gross margin of almost 60%.

Meanwhile, Fastly and other CDN companies are having to compete in terms of pricing, a move that could see it struggle to boost its margins in the near term. 

Analysts have a mixed opinion on the Fastly stock price. In a recent note, an analyst at Piper Sandler slashed the stock from overweight to neutral just a month after he hiked his rating.

Fastly stock price analysis

The weekly chart shows that the FSLY share price has been in a steady downtrend in the past few months. It recently dropped below the key support level at $7.23, its lowest point in 2023. Moving below that level confirmed that bears were in control. 

The stock has dropped below the 50-week and 100-week moving averages while most oscillators have pointed downwards. Therefore, the stock will likely continue falling as sellers target the key resistance point at $4.5. On the flip side, the stock could see more upside if it goes through a short squeeze because it has an 11% short interest.