Fastly stock: this fallen angel may jump 35% after earnings

Fastly (FSLY) stock has been one of the worst-performers this year as the company’s growth has decelerated and losses have mounted. It has crashed by over 57% this year, while the Nasdaq 100 and S&P 500 indices have risen to their record highs. 

Fastly has also underperformed its closest rivals. Cloudflare stock is up by 5%, while Akamai Technologies has fallen by almost 7%.

Fastly is a bruised tech giant

Fastly is one of the most important technology companies that most people have never heard about. Yet, it is a crucial cybersecurity company that secures websites like Github, The New York Times, Pinterest, Spotify, and Reddit. 

Its primary solution is its Content Delivery Network (CDN), which ensures that websites are delivered faster and securely globally. It also offers solutions like bot management, DDoS attacks prevention, and real-time logging.

Most recently, the company entered the artificial intelligence industry by launching solutions that let developers accelerate their ChatGPT applications. 

While Akamai and Cloudflare dominate the CDN industry, Fastly has emerged as one of the best-known brands by CTOs. It will remain being a fairly smaller name than these other companies. 

Fastly’s business has struggled in the past few years as its sales growth has deteriorated. This slowsdown intensified after the company went through a big outage in 2021 that affected users from around the world. As a result, some clients moved to its alternatives, while many potential customers went to Cloudflare. 

Fastly’s annual revenue grew from $200.5 million in 2019 to over $506 million in the last financial year. Recently, its revenue growth has been weaker than expected, while its losses have been substantial.

FSLY earnings ahead

The next important Fastly news will come out on Wednesday when the company publishes its financial results.

The most recent numbers showed that Fastly’s revenue rose by 8% in the second quarter to $132.4 million. Most of these numbers came from the network services division, which made $104.2 million.

Its smaller security division made $25.4 million. Most importantly, Fastly expanded its gross margins to 55.1%, while its net loss per share narrowed during the quarter. 

Analysts expect that Fastly’s revenue will come in at $131 million, a 3.80% increase from what it made in the same quarter last year. For the next quarter, its revenue is expected to be $137 million, a 0.3% drop.

Analysts expect the numbers to show that its annual revenue will be $535 million followed by $563 million in 2025. 

There are signs that Fastly is still an overvalued company even after dropping by double digits in the past few years. 

For a SaaS company like this, the best approach to value it is through the rule of 40. In this, adding its net profit margin and its growth should result in a figure higher than 40. Fastly’s forward revenue growth is 13.5%, while its net income margin is minus 31%, resulting to a rule of 40 figure of minus 18. 

This means that the company is severely overvalued since the management is focusing on revenue growth than profitability.

Also, Fastly has weaker margins than Cloudflare, a company that it offers a similar product. Its gross profit margin is 54% and its net margin is minus 31%. Cloudflare has a gross profit margin of 77% and a net income margin of minus 6.90%. 

Therefore, fundamentally, there are signs that Fastly stock will remain under pressure for a while. 

Read more: Fastly (FSLY) stock price analysis: is it safe to buy this dip?

Fastly stock price analysis

FSLY chart by TradingView

On the positive side, there are signs that the FSLY share price has bottomed as it formed an inverse head and shoulders pattern. It has jumped above the 50-day moving average and formed an inverse head and shoulders pattern. 

Therefore, there is a likelihood that the stock will rise to the 23.6% Fibonacci Retracement level at $10.3, which is about 36% higher than the current level. This rebound will likely happen if it narrows its losses and boosts its forward guidance.

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