New Trade for October 20th, 2020

Stocks are attempting to bounce after another afternoon slide yesterday.  The Nasdaq lost nearly 1.7%, extending its losing streak to five days.  The Dow slipped 1.4% and the S&P 500 fell 1.6%.  This morning Wall St. awaits an announcement from the Department of Justice on the future of google.  The DOJ briefing is scheduled for later this morning.  

Earnings are in full swing with SNAP and NFLX reporting today after the closing bell.  Lower than expected numbers may push shares of FSLY back to an attractive entry point.  

Last week, Fastly announced a 5% reduction in revenue guidance for the third quarter from $73.5-75.5 million to $70-71 million causing share prices to crash almost 30%.  The company cited the uncertain geopolitical climate, its largest customer, TikTok, did not meet usage expectations.  But Fastly’s fate doesn’t solely hinge on their relationship with TikTok.  There is one important factor that those who are selling may not be considering.

The thing is that Fastly is not a typical software-as-a-service business, the company charges clients based on their usage.  This has many advantages for clients since they only pay when they get value from the provider, and they don’t need to assume big financial commitments up front.  This business model has attracted such notable names as Spotify, Stripe and the New York Times and Fastly continues to attract major players.  

However, this business model that is so convenient to customers and has so many benefits on the commercial side also means that revenue is inherently harder to predict and more volatile.   At the end of the day, over the long term, happy clients will mean happy investors, but FSLY investors will have to stomach the volatility that comes with their business model.   

FSLY has enormous room for growth in security and edge computing.  As long as management continues to deliver, the long term case for FSLY is bullish.  FSLY shares are currently trading at around the same price it was trading back in June.  Movement elsewhere in the tech sector could aid the price even lower as DOJ/Google news surfaces.