Technology

Fastly Offers Lessons for High-Flying Cloud Stocks That Have Any Hiccups at All

Jon C. Ogg

Published: October 14, 2020 4:49 pm

Guess what happens when high-flying cloud provider have problems reaching their sales or earnings expectations. Fastly, Inc. (NYSE: FSLY) can tell you. The company’s edge cloud platform enables its customers to create great digital experiences in a fast and secure manner, but the company has seen its shares rise from $20 before the pandemic to over $120 recently.

Fastly’s stock was being gutted on Wednesday after the close after a company disclosure set new targets for its third quarter of 2020. The new target is calling for total revenue of $70 million to $71 million, slightly lower than the prior guidance of $73.5 million to $75.5 million. The company also noted that all of the previously issued guidance for its third quarter and full-year which had been disclosed in prior months should no longer be relied upon.

The company did cite some specific factors. Impacts of the uncertain geopolitical environment and usage of Fastly’s platform by its largest customer did not meet expectations. This resulted in a significant reduction in revenue from its top customer. Fastly also noted that a few of its customers had lower usage than Fastly had estimated during the latter part of the third quarter.

It may seem odd on the surface that a 4% drop to $123.18 in the regular trading session would be followed up by a drop of more than 25% in the after-hours trading reaction. This miss sounds small, but problems with the top customer and noting that lower usage was seen by a few other customers might imply that the core platform is not going to be as widely adopted as some investors would hope.

Another big concern here is that Fastly’s rapid stock price rise took its market cap up to $13.7 billion at the end of the trading day. This valued it at close to 35 times expected 2021 sales expectations from Refinitiv, and the company was expected to report a 3-cent loss per in 2020 and a 3-cent per share earnings for all of 2021.

Fastly had been a posterchild of the high-flying cloud stocks have surged with the rise of the technology sector despite a weak economy, despite a weak IPO in 2019. The company also admitted that the current global environment has in some ways fueled the growth of its business, while also having created areas of uncertainty despite the claim that its fundamentals and demand remain strong.

Fastly shares were last seen trading down 27% at $89.85 on Wednesday in the after-hours trading session. The $123.18 closing price was already handily above the $96.90 consensus analyst price target.

Fastly CEO Joshua Bixby said:

And while the timing of this required disclosure is atypical, it is part of completing the Signal Sciences transaction, which brings us a stellar team and product portfolio that further differentiates us from our competitors. I look forward to discussing our full third quarter results and the outlook for our combined businesses later this month.

It is uncertain if the news from Fastly alone is enough to start taking a wrecking ball to other emerging cloud stocks that have flown higher in 2020. That said, it sure set’s a benchmark for what to expect if these high-flyers valued at 20 to 50 times revenues have any hiccups at all.