The Fastly Case: Overvalued?

Growth Stocks Selling For 30 Times Sales Has Become Normal. But Is It?

Fastly is U.S.-based cloud computing services provider. In short, it processes, serves and secures its customer’s applications as close to the end users as possible. This happens through Fastly’s Edge Platform that provides a content delivery network (CDN), internet security, load balancing and video & steaming services.

• A CDN is able to increase a networks’ performance by distributing the information geographically relative to the end-users
• Cybersecurity is another sector in which Fastly shines as its cloud security solutions are able to mitigate DDoS (Distributed Denial of Service) attacks, counter malicious bots and offers a web application firewall

The growing demand for cybersecurity solutions and more efficient networks should thus provide the organic demand Fastly needs to power its growth.

• Fastly’s stock price rocketed in 2020, going from $ 20 to a high of $ 136.5 giving it at one point a market cap of more than $ 15B, for annual sales of around $ 200m

Yet, was this reasonable?

• A quick and easy way to know is to check the market cap, sales, growth, multiple and margins of a sectorial leader. In this case: Akamai Technologies

• In this case, Akamai boasted the same valuation as Fastly at its peak. Yet, it generated 10 times more revenue per quarter than Fastly. All while scoring higher gross margins
• However, this situation was not sustainable and Fastly’s share price plummeted to $ 45 a share by the start of May as revenue growth decelerated and gross margins decreased

BENCHMARK’S TAKE

Fastly is now trading at around 15 times sales. However, we are still very cautious on Fastly’s prospects as it may need to fuel its growth through acquisitions in the foreseeable future

• With $1 B of cash on hand and a depressed share price, the company may have to raise additional capital to sustain its growth
• In the same vein, we are extremely cautious on Cloudflare (NYSE:NET) whose valuation rests on an Enterprise Value To Sales ratio of 45. This company is now larger than Akamai despite generating 6 times less sales

Disclaimer

Please note that this article does not constitute investment advice in any form. This article is not a research report and is not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products.

Credits

Photo by Donald Giannatti on Unsplash.