Fastly: The Canary In The Coal Mine (NYSE:FSLY)

Prior to last night's revenue shortfall warning, and as of its 4 p.m. Nasdaq closing price, shares of FSLY were trading at 44X FY 2020 revenue.

Last night, SaaS darling Fastly revised downward its quarterly revenue projections. Its stock got taken to the woodshed in after-hours trading.

This past September 2020, I turned 40. I have obsessively been following the stock market since high school, worked on the buy side for five years (in a $50 billion Investment Grade bond group), and been investing for well over 20 years. Given this 20-plus years of experience you see a lot and you learn a lot, often by making mistakes. That said, learning vicariously is the least expensive form of tuition paid to Mr. Market.

Given this experience, I'm reminded of this famous phrase:

As a value investor I have watched from the shoreline as technology stocks have gone parabolic in 2020. The technology group reminds me so much of the euphoric 1999 and Q1 2020 time period. In 2020, it's commonplace to read story about 30-year-olds cashing out their tech stock options that are now worth tens of millions of dollars. Moreover, occasionally you even read about a handful of technology start-up founders knighted as young billionaires by Mr. Market, at least on paper (they still to have figure out how to convert those shares to cash as Mark Cuban famously did when he sold his Broadcast.com shares to Yahoo and monetized them).

Anyway, last night, in my Marketplace group Second Wind Capital I had a young reader ask me if he should buy the dip in Fastly (FSLY) as shares were trading around $91 or $92. He's very knowledgable when it comes to technology and eloquently articulated why Fastly is so hip and how amazing FSLY's technology is and finally why he was considering buying shares.

I said these SaaS valuations are starting to remind how analysts used to value Yahoo based on the growth of its page views.

Prior to last night's revised guidance, and of July 31, per its 10-Q, Fastly had 90.4 million Class A common shares and 14.8 million Class B common shares outstanding.

$123.18 per share x (105.2 million total shares) equaled a $13 billion market capitalization, as of yesterday's 4 p.m. close on the Nasdaq.

For perspective, Fastly went public on May 21, 2019, at $16 per share (they sold just shy of 13 million shares). On May 26, 2020, the company did a follow on offering and sold 6.9 million shares at $41.50 per share.

If you look at Fastly's stock chart this year it has gone from $20 per share on Jan. 2 to its 52-week high of $136.50 on Oct. 13 (as in two days ago).

Source: Fidelity

Given this parabolic move, you might think the company made some major medical breakthrough. Nope, the company basically securely speeds up web videos.

Here's how Fastly's describes its "whiz bang" software in its business description found in its 10-K.

Meanwhile, back in reality, outside of escape velocity and Neverland, at least as of last night, Fastly was trading at 44X FY 2020 revenue. Before you fall off your chair, I did say revenue. That wasn't a typo where I was supposed to write adjusted EBITDA. As you can see below, consensus estimates for FY 2020 called for a report card where measuring up to the mark meant Fastly needed to produce an EPS loss $0.04 per share and revenue of $295 million.

Source: Yahoo Finance

At least in my value-oriented mind, to sport a market capitalization of $13 billion and to trade at 44X this year's revenue would mean this company would need to be growing revenue at 50% for three years and then at 20% for the next five years for yesterday's valuation to make any semblance of rational sense. Lo and behold, 11 sell siders were only modeling FY 2021 revenue growth of 33%.

Now Fastly isn't unique and isn't alone when it comes to its valuation. Most of the SaaS and technology stock have been anointed with insane valuations. Again, there are countless other examples of insane valuations that make zero logical sen...

Prior to last night's revenue shortfall warning, and as of its 4 p.m. Nasdaq closing price, shares of FSLY were trading at 44X FY 2020 revenue.

Last night, SaaS darling Fastly revised downward its quarterly revenue projections. Its stock got taken to the woodshed in after-hours trading.

This past September 2020, I turned 40. I have obsessively been following the stock market since high school, worked on the buy side for five years (in a $50 billion Investment Grade bond group), and been investing for well over 20 years. Given this 20-plus years of experience you see a lot and you learn a lot, often by making mistakes. That said, learning vicariously is the least expensive form of tuition paid to Mr. Market.

Given this experience, I'm reminded of this famous phrase:

As a value investor I have watched from the shoreline as technology stocks have gone parabolic in 2020. The technology group reminds me so much of the euphoric 1999 and Q1 2020 time period. In 2020, it's commonplace to read story about 30-year-olds cashing out their tech stock options that are now worth tens of millions of dollars. Moreover, occasionally you even read about a handful of technology start-up founders knighted as young billionaires by Mr. Market, at least on paper (they still to have figure out how to convert those shares to cash as Mark Cuban famously did when he sold his Broadcast.com shares to Yahoo and monetized them).

Anyway, last night, in my Marketplace group Second Wind Capital I had a young reader ask me if he should buy the dip in Fastly (FSLY) as shares were trading around $91 or $92. He's very knowledgable when it comes to technology and eloquently articulated why Fastly is so hip and how amazing FSLY's technology is and finally why he was considering buying shares.

I said these SaaS valuations are starting to remind how analysts used to value Yahoo based on the growth of its page views.

Prior to last night's revised guidance, and of July 31, per its 10-Q, Fastly had 90.4 million Class A common shares and 14.8 million Class B common shares outstanding.

$123.18 per share x (105.2 million total shares) equaled a $13 billion market capitalization, as of yesterday's 4 p.m. close on the Nasdaq.

For perspective, Fastly went public on May 21, 2019, at $16 per share (they sold just shy of 13 million shares). On May 26, 2020, the company did a follow on offering and sold 6.9 million shares at $41.50 per share.

If you look at Fastly's stock chart this year it has gone from $20 per share on Jan. 2 to its 52-week high of $136.50 on Oct. 13 (as in two days ago).

Source: Fidelity

Given this parabolic move, you might think the company made some major medical breakthrough. Nope, the company basically securely speeds up web videos.

Here's how Fastly's describes its "whiz bang" software in its business description found in its 10-K.

Meanwhile, back in reality, outside of escape velocity and Neverland, at least as of last night, Fastly was trading at 44X FY 2020 revenue. Before you fall off your chair, I did say revenue. That wasn't a typo where I was supposed to write adjusted EBITDA. As you can see below, consensus estimates for FY 2020 called for a report card where measuring up to the mark meant Fastly needed to produce an EPS loss $0.04 per share and revenue of $295 million.

Source: Yahoo Finance

At least in my value-oriented mind, to sport a market capitalization of $13 billion and to trade at 44X this year's revenue would mean this company would need to be growing revenue at 50% for three years and then at 20% for the next five years for yesterday's valuation to make any semblance of rational sense. Lo and behold, 11 sell siders were only modeling FY 2021 revenue growth of 33%.

Now Fastly isn't unique and isn't alone when it comes to its valuation. Most of the SaaS and technology stock have been anointed with insane valuations. Again, there are countless other examples of insane valuations that make zero logical sen...