Beware of This Recently Downgraded Software Stock

15, 2021

5 min read

This story originally appeared on StockNews

Content delivery network provider Fastly (FSLY) last week triggered a global internet blackout that affected popular websites and government servers. While the outage has been attributed to a solitary software bug, the company’s market reputation took a big hit, causing Oppenheimer analysts to downgrade the stock from Buy to Hold. And because analysts expect FSLY’s growth potential to remain subdued in the near term, we think the stock is best avoided now. Let’s discuss.

Real time content delivery network company Fastly, Inc. (FSLY) was downgraded by Oppenheimer on June 10, causing the stock’s price to decline 6.2% from a $54.73 intraday high. Oppenheimer analyst Timothy Horan downgraded his rating on the stock from Buy to Hold following the global internet outage triggered by a software bug.

Though the company’s prompt response has drawn praise, Horan expects investors to switch to alternative platforms given the lower cost of switching content distribution network (CDN) for second source providers, and the large number of established players.

In addition, FSLY’s mixed performance in the last quarter has created uncertainty regarding the company’s operational efficiency. Despite a 35% year-over-year rise in revenues in the first quarter, ended March 31, FSLY’s non-GAAP loss per share doubled to $0.12. And its operating loss increased 316.7% from the same period last year to $50 million. FSLY’s share price has slumped 34.3% year-to-date, and 22.5% over the past three months.

Click here to check out our Software Industry Report for 2021

Here’s what we think could shape FSLY’s performance in the near term:

Global Internet Outage

A FSLY software glitch caused popular internet websites, including government servers, to stop functioning for about an hour on June 8. The problem was reportedly caused by a software bug when a customer changed settings. As one of the major content delivery providers, FSLY is responsible for reducing the distance between servers and users, thereby boosting website loading speed. Following the glitch, several websites, including Financial Times, Reddit and some government websites, went down.

While this glitch has been written off as an isolated incident, tech and internet companies are now looking closely  at alternative content distribution network (CDN) platforms. Because the rising popularity of cloud computing services has incentivized established companies and start-ups to develop innovative software solutions, Oppenheimer analyst  Horan expects people to substitute FLSY with other popular CDN providers. Moreover, FSLY’s  damaged track record following this temporary internet snafu is expected to impact its future sales.

Bleak Earnings Growth Outlook

A $85.75 million consensus revenue estimate for the current quarter, ending June 2021, indicates a 14.8% improvement year-over-year. The company’s annual revenue is expected to increase 31.4% year-over-year to $382.18 million in  2021.

However, the Street expects FSLY’s EPS to remain negative until at least 2022. Furthermore,  the company’s EPS is expected to decline 950% in the current quarter, 125% in the next quarter, and 138.9% in the current year.

Consensus Rating and Price Target Indicate Marginal Downside

Of  nine Wall Street analysts that rated FSLY, eight rated it Hold while one rated it Sell. A $56  median price target  indicates a 2.5% potential downside from yesterday’s $57.45 closing price. The 12-month price targets range from a low of $45 to a high of $90.

Unfavorable POWR Ratings

FSLY has an overall F rating, which equates to Strong Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

FSLY has an F grade  for Sentiment, and D for Value, Quality and Stability. The company’s poor growth outlook–analysts expect EPS to remain negative until at least next year–justifies the Sentiment grade. Also,  the stock’s relative overvaluation is evident in its 17.39  forward Price/Sales ratio, which is 325.3% higher than the 4.09 industry average, in sync with the Value grade. FSLY’s negative ROE and 1.09 beta justify the Quality and Stability grades, respectively.

Of the 132 stocks in the D-rated Software – Application industry, FSLY is ranked last.

In total, we rated FSLY on eight different levels. Beyond what we’ve stated above, click here to view FSLY Ratings for Growth and Momentum.

View the top-rated stocks in the Software – Application industry here.

Bottom Line

FSLY’s role in the global internet outage and its  recent stock downgrade has negatively impacted the company’s reputation. The stock is currently trading below its $76.21 200-day moving average, indicating an overall downtrend. This, combined with poor financials and growth potential, we think makes the stock best avoided now.

Click here to check out our Software Industry Report for 2021

FSLY shares were trading at $57.47 per share on Tuesday morning, up $0.02 (+0.03%). Year-to-date, FSLY has declined -34.22%, versus a 13.98% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don’ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.


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