Is Fastly's share price a bargain right now?

Fastly's [FSLY] share price has plummeted around 30% since the start of August. Triggering the sell-off is US president Donald Trump's threat to ban the edge-computing provider's single biggest customer, TikTok, from operating in the US. Given how far Fastly's stock has fallen, is it now a bargain or just dead weight?

Why should investors care about Fastly's share price?

Fastly's share price is one of the standout performers this year. Between the start of 2020 and 4 August, the stock gained over 478%. Pushing it higher were a surge in traffic and stellar quarterly results.

For some, the recent pullback in Fastly's share price presents a buying opportunity. Before second-quarter results, there was talk that Fastly’s gains couldn't be maintained, but whether or not Fastly's share price can make up lost ground depends largely on what happens to TikTok in the US.

What's the impact of losing TikTok?

TikTok represents 12% of Fastly's revenues, so the impact of losing its business cannot be underestimated. This is something Fastly CEO Joshua Bixby articulated during the second-quarter earnings call:

“Any ban of the TikTok app by the US would create uncertainty around our ability to support this customer. While we believe we are in a position to backfill the majority of this traffic in case they are no longer able to operate in the US, the loss of this customer’s traffic would have an impact on our business.”

“Any ban of the TikTok app by the US would create uncertainty around our ability to support this customer. While we believe we are in a position to backfill the majority of this traffic in case they are no longer able to operate in the US, the loss of this customer’s traffic would have an impact on our business” - Fastly CEO Joshua Bixby

Fastly's share price dropped 18% the same day it posted stellar Q2 earnings because of this issue. In those results, revenue jumped 62% to come in at $74.7m compared to the same period last year. That easily beat analysts’ already sky-high expectations of $71.4m.

However, next quarter's earnings could take a hit if a buyer for TikTok isn't found. Rumours suggest that Microsoft, Oracle and Twitter are all in the mix to purchase the social media platform. With less than a month until 15 September to make a deal, though, time is running out.

Timothy Horan, an analyst at Oppenheimer, downgraded his rating on the company following the news, saying the reliance on TikTok was a “major risk” to Fastly’s share price.

“A TikTok ban in the US could prevent FSLY from hitting 3Q/FY20 guidance. TikTok is FSLY’s largest customer and is likely ~15% of revenues in 1H20, with about half that generated in the US. We do think a TikTok/MSFT deal is far from certain, and long-term MSFT could move TikTok delivery on its own edge infrastructure.”

What's the outlook for Fastly this year?

Fastly is guiding for revenues between $73.5m and $75.5m, on a $0.01 loss per share for the third quarter. For the full year, Fastly has upped its revenue target from between $280m and $290m to $290m and $300m. It also expects losses to come in between $0.01 and $0.06 per share this year, better than the previous $0.08 to $0.15 loss per share. Reducing these losses and edging towards profitability will be key to any sustained gains in Fastly's share price.

Any other factors to consider?

Another investment consideration is Fastly's use of debt to fuel growth, but here things appear to be moving in the right direction. Last year, Fastly's total reported debt was $29.63m, down from the previous year's $50.81m. A concern will be that net income fell 66.64% between 2018 and 2019, going from a loss of $30.94m to a larger loss of $51.55m. This is despite revenue increasing 38.67% to $200.46m in the same time period.

However, in 2019 Fastly increased its cash reserves by 133.28% to $49.27m, giving it more than enough to pay off its liabilities. While the forecast reduction in losses this year puts the company on the path to profitability, losing TikTok could put the balance sheet under pressure.

Fastly share price vitals, Yahoo Finance, 20 August 2020

So, time to buy Fastly?

Fastly carries an average $99.00 12-month price target from the analysts tracking the stock on the Financial Times. Hitting this would see a 26.3% upside on Fastly’s share price through 18 August’s close. Of the 11 analysts offering recommendations, 6 rate it a Buy.

Given the potential discount on Fastly's share price, now could be the time for investors to buy the stock. A resolution to the TikTok story could see the stock climb higher in September.

Investors should bear in mind that the reverse is also true, though: if TikTok can't do business in the States, Fastly's revenue streams will suffer.