This Overcorrection Is a Great Chance to Get in on Fastly Stock

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Fastly (NYSE:FSLY) issued a negative third-quarter preannouncement on Oct. 14, citing weaker-than-expected demand from its largest customer, ByteDance’s TikTok and “lower usage” by “a few other customers.” Fastly stock has tumbled since the announcement, losing nearly 40% of its value.

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According to conventional wisdom, the decline of the demand from TikTok was caused by uncertainty over its fate in the U.S. Fastly certainly has fueled that viewpoint with its statement blaming the demand decrease on “the impacts of the uncertain geopolitical environment.”

But I believe that the reopening of societies in general and schools in particular were the main catalysts for the decline in the usage of TikTok and of the “few other customers” to which Fastly alluded.

While that trend will be slightly negative for Fastly in the shorter term, the longer term outlook of Fastly stock remains very bright.

Reopenings Hurt Fastly Stock

I find it difficult to believe that the decline in TikTok’s usage was actually primarily caused by “geopolitical” issues. It’s true that the Trump  administration gave the app bad publicity by warning that China could use it to steal Americans’ private information.

But my research did not indicate that  TikTok requires users to submit payment information (I’m not a TikTok user myself), so that is probably not a concern for the app’s users and their families.

Further, there has been a great deal of concern about Alphabet’s (NASDAQ:GOOG,NASDAQ:GOOGL) Google obtaining users’ personal information, but that hasn’t seemed to stop many people from using the search engine. Moreover, for years  the U.S. government collected many of Americans’ e-mails, but that did not lead to an exodus away from e-mails.

While I agree that Beijing collecting Americans’ personal information is more ominous than Google and Washington doing so I still can’t see the Trump administration’s warning about TikTok resulting in a meaningful decline of the app’s traffic.

India banned the app on June 30, so its impact would have been reflected in Fastly’s Q2 results and initial Q3 guidance.

Conversely, since TikTok’s user base is disproportionately young, the return of hundreds of millions of young people to school and work, as well as the reopening of tens of thousands of restaurants and stores, would have a huge impact on usage of the app. And of course, reopenings would also negatively impact many of Fastly’s other customers, including Spotify (NYSE:SPOT).

Put another way, do you think high school students who are physically going to school will have nearly as much time to spend on TikTok and Spotify as they did during the summer break or during the spring when they were sporadically paying attention to their classes online?

Positive Outlook for Fastly Stock

First of all, nearly everyone expects internet usage to surge over the longer term, especially in light of the internet-of-things phenomenon. And since 5G will make using and communicating with the internet easier, while young people will generally become more attached to the internet going forward and many more products will be connected,  that makes sense.

I  believe that Fastly is very well-positioned to benefit from that trend. As I’ve noted in previous articles, developers appear to love using its products, while its recent acquisition of Signal Sciences should make its offerings much more appealing to companies that are concerned about IT security.

The Bottom Line

Since its preannouncement, Fastly stock has tumbled nearly 40% from its 52-weekl high  of $136. The shares are now trading near the price targets of two analysts who were fairly bearish on the name.

Even CNBC’s Jim Cramer, who has frequently complained that the shares are overvalued, on Oct. 14 urged investors to buy it if it dropped a bit further. Since then, the name has declined about 10%.

Fastly’s slightly reduced Q3 guidance is just a bump in the road which was largely caused by the reopening of economies and schools. Over the longer term, Fastly stock, which currently has a market capitalization of just $9 billion, will likely trend much higher. As a result, it’s a buy for longer-term investors.

On the date of publication, Larry Ramer held a long position in Fastly. 

Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been Roku, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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