Fastly Underwriting Firm Analysts Offer Little Great Upside Excitement

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Fastly Inc. (NYSE: FSLY) ran into a bit of a valuation gap between its post-IPO investors and the analysts from the underwriting syndicate who have finally been allowed to cover the stock.

The cloud computing and services provider’s Edge cloud platform provides a content delivery network along with security services, load balancing, and video and streaming services.

After pricing 11.25 million shares at $16.00 in its initial public offering, the shares quickly traded up 40%. That premium put its shares up at $23.99 for the first day’s closing price after a high of $25.67 on its debut. Unfortunately, that was the also the post-IPO high as the shares have come in since its debt to a close of $22.86 ahead of the quiet-period expiration.

Credit Suisse issued an Outperform rating, but the firm assigned only a $25 price target. Their call sounded more impressive on the wording rather than the targets, noting greater than 25% revenue growth potential in each of the next three years along with margin expansion. Credit Suisse sees the firm as well positioned to capitalize on a paradigm shift in computing as application logic and content increasingly migrate to the ‘Edge.’ Its belief is that demand for ‘Edge Clouds’ is currently being underappreciated as many best-use cases have yet to be defined.

Merrill Lynch also issued a Buy rating and a $26 price objective. The firm’s call addressed it as the leader in a high-growth market with a differentiated solution in its Edge Compute services, but it also called it a highly competitive market with low profitability. Here was how the advantage is described:

Fastly operates 1,600 servers in 60 Points of Presence globally, using expensive $30,000 servers, low-latency Arista switches, and solid-state drives. In addition, Fastly uses Varnish open source software for caching, which enables it to globally update content in less than 1 minute versus competitor specs of 15 to 30 minutes… Fastly’s differentiated architecture is tailored to deliver low-latency content, which has become a necessity in a digital world. The company’s open-source software stack and security solutions enable Fastly to move into the emerging Edge Compute market, which could provide further upside. We expect Fastly’s SaaS model and add-on offerings to deliver sustainable high growth and lift up margins, reaching profitability by 2021.

24/7 Wall St. has tracked three other analyst calls in Fastly on Tuesday:

  • D.A. Davidson issued a Buy rating and started it with a $26.50 price target.
  • Robert W. Baird gave an Outperform rating and assigned a $28 price target.
  • Stifel issued a Buy rating and a $25 price target.

Oppenheimer started coverage as Outperform and coverage from Raymond James has not yet been seen.

Interestingly enough, the selling pressure in may might have allowed the shares to not get too far ahead of themselves in valuation. Fastly shares bottomed out with a closing low of $20.04 on June 3 before another closing low of $19.77 on June 5.

Some investors have been calling companies out in recent weeks and months that are not profitable. After all, if the profits are not expected for another couple of years as things are today, what happens if and when those persistent media calls predicting the next recession actually come to fruition?

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Most traditional analyst calls in Dow and S&P 500 stocks offer 8% to 10% upside to their price targets in this stage of the 10-year old bull market. Fastly received some great comments about the growth potential, but it’s lack of peer-related upside for the shares to the “Buy targets” just sin’t offering enough upside for investors. That means many speculative technology investors are likely to put Fastly on a watch list and hope for a pullback before jumping in here.

Shares of Fastly were last seen down almost 1% at $22.64 ahead of Tuesday’s closing bell. It has a post-IPO range of $19.33 to $25.67 and a $254 million market cap.

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