Why Fastly Stock Plunged 14% on Tuesday
Key Points
Evercore started coverage at outperform, pointing to strong demand for edge computing and security tools.
Craig-Hallum downgraded Fastly to hold, citing a stock price that already reflects fair value.
Fastly stock had gained 345% over the past year before Tuesday's drop.
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After a spirited round of "dueling analysts," shares of Fastly (NASDAQ: FSLY) closed 14% lower on Tuesday. One analyst firm issued a bullish report on the stock and another posted a bearish review; many investors agreed with the negative analysis.
Dueling analysts can't agree on Fastly
Let's start on the bearish side of the fence. Craig-Hallum analyst Jeff Van Rhee downgraded Fastly's stock from "buy" to "hold," with a price target of $24 per share. The stock closed Monday's trading at $24.37, roughly in line with the firm's value projection. Van Rhee noted that Fastly's stock has risen sharply from last September, when the now-defunct "buy" rating was issued. At current prices, the firm doesn't expect much further upside as Fastly wrestles soaring hardware costs.
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At the same time, Evercore analyst Peter Levine started Fastly coverage at "outperform" with a $32 price target. In Levine's view, massive demand for content delivery and edge computing services outweighs Fastly's lofty valuation. The company's combo of AI computing at the network edge and robust security tools makes Fastly a compelling investment idea in Evercore's analysis.
Again, many investors either accepted Craig-Hallum's softer outlook or took some recent profits off the table. As of Monday night, Fastly had gained 345% in 52 weeks. Even now, after a sharp price drop, it's up by 282% in a year.
Image source: Getty Images.
Why the bears won this round
Both analyst firms had some solid points, and it's easy to see why the bearish view was more popular today. Fastly is a turnaround story in progress with new management and questionable financials. 22% year-over-year revenue growth in February's fourth-quarter report is balanced by negative earnings on a trailing twelve-month basis. The stock trades at 75 times free cash flow today, and the incoming AI edge computing orders have some heavy lifting to do.
That said, I'm not in a hurry to sell my Fastly shares, because the AI tailwinds are still blowing. Management expects positive adjusted earnings and at least $40 million of free cash flow in 2026.
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Anders Bylund has positions in Fastly. The Motley Fool has positions in and recommends Fastly. The Motley Fool has a disclosure policy.
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