In May, I wondered if Fastly (FSLY) was going too fast, again. At the time, shares had rallied to levels around the $40 mark, which actually was quadruple the low of around $10 during the height of the Covid-19 crisis, and roughly double the level at which they traded ahead of the entire crisis. While the company has seen a real growth acceleration, investors have gotten carried away as they now trade at double the level, and that is even after a retreat of a third from recent highs.

The Numbers – The Thesis

In May the company reported very strong first quarter earnings and furthermore hiked the guidance in a huge way, as the company has seen a big boost on the revenue side, actually the result of the current Covid-19 crisis. The company’s solutions and services are particularly useful for developers in developing personalized applications, and develop them fast and securely, as the programmable edge and other features of the service gives power to customers. These solutions help to keep the internet fast and more secure, much desired qualities in this environment, especially as many businesses overnight needed to go online, or significantly expand operations.

The company generated sales of $105 million in 2017, on which it lost $31 million. Sales rose 38% to $145 million in 2018 with operating losses narrowing slightly to $29 million. In May 2019 Fastly went public at $16 per share, only to end the first day of trading around the $25 mark, which valued operating assets at 15 times 2018 sales. I was a bit cautious at those levels, as I was not particularly impressed with the risk-reward provided by the sales multiple in relation to the reported growth rates.

2019 results have been resilient with sales up 39% to $200 million, as the company reported a run rate of $240 million in sales at the end of the year, yet operating losses based on GAAP accounting rose to $46 million. The company guided for sales of $260 million in 2020 and adjusted operating losses of $38 million, marking a $4 million increase in losses compared to 2019.

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First quarter results for this year have been very impressive with revenues up 38% as the company hiked the full year sales guidance by $25 million to $285 million. More importantly, the company guided for a $23 million improvement in operating losses, very impressive improvements as the company has seen strong sales momentum in banking, e-commerce and other businesses going digital at a rapid pace. The resulting increase in the revenue base and lack of travel and fact that more workers work from home, result in a reduction in operating costs. With shares up to $37 following the first quarter results, operating assets were valued at $3.4 billion, or about 12 times the revised sales guidance.

What Now?

After a very impressive first quarter number and impressive raise in the guidance, the momentum ignited alongside the quarterly results has almost seen no end, as the market has rewarded current winners while punishing the losers.

Shares tripled again through July as they hit the $100 mark and nearly hit the $120 mark early in August. This momentum has surprised management as well. On the 21st of May the company issued another 6 million shares at $41.5 per share, in an offering which raised a quarter of a billion, excluding the greenshoe option.

Early August, the company reported its much awaited sector quarter results. Revenues rose 62% to $75 million and thereby showed a nice acceleration, yet operating losses (GAAP accounting) were basically flat at $15 million. This growth acceleration was of course well priced in by the market with shares increasing a factor of 10 times from the Covid-19 induced lows. The company hiked the full year sales guidance by ten million to $290-$300 million, yet at the same time actually cut the margin guidance. Adjusted operating profits, previously seen at a midpoint of zero, are now seen around $7 million. Furthermore, the third quarter revenue guidance at a midpoint of $74.5 million actually suggests some sequential declines, although this guidance is likely conservative.

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With a current share count of 100 million and these shares until recently trading around $100, as the $10 billion equity valuation translates into an operating asset valuation of around $9.7 billion, and even more at its peak. At these levels, valuation multiples have ballooned to about 32 times sales, and while sales growth rates have meaningfully accelerated, sales multiples have expanded only further as the company failed to deliver on the promise of operation leverage. With shares now down to $80, the operating asset valuations come in at $7.7 billion, or 26 times anticipated sales.

Some Thoughts

Other than that multiples have expanded from just around 10 times sales, or even lower earlier this year, to about 32 times sales, there are a few other drivers which making investors nervous. For starters is that the guidance was not hiked in a big way after stellar share price momentum, and furthermore there seems to be some pressure on margins.

There is another big implication which is driving the near term thesis and that is the size and reliance on of its largest customer TikTok. This company has seen substantial growth in recent quarters and actually might be the key driver behind (part of) the recent operational and thus share price momentum.

With the service either being shut down perhaps in the US, or Microsoft (MSFT) acquiring the business and perhaps move the business to its own servers, there is a real risk to Fastly, although this would likely just be a short to medium term impact. Nonetheless, this is still important as TikTok represented 12% of sales on a global basis over the past six months, while the US represents less than 50% of that.

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At this moment we find ourselves in a strange situation with shares down a third from the highs set just weeks ago, yet shares remain up a factor of 8 times from the Covid-19 lows, and 4 times when the situation was still ”normal” in February. The company has seen some real operating momentum, yet it is still telling that the company has being raising some cash at $41.5 per share in May, at just 50% of the current valuation. Despite the growth acceleration, sales multiples are still quite elevated as the third quarter sales suggest flattish revenues at best compared to the second quarter.

Hence, it might be too soon to perhaps go bottom fishing, although further declines could be used to initiate small as this market continues to reward strong and future proof growth platforms, including Fastly.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.