Fastly stock drops 20% as analysts weigh in on how TikTok may affect the edge-computing platform’s growth


Fastly Inc. shares pulled back from their recent lofty heights Thursday, as analysts weighed in on how the popular video-sharing platform TikTok will affect the edge-computing platform’s growth as more businesses migrate functions to the cloud.

Fastly
FSLY,
-16.24%

shares fell as much as 21% Thursday, and were last down 17% at $90.40, on volume of more than 23 million shares, compared with a 52-week average daily volume of 3.4 million shares.

Late Wednesday, Fastly reported quarterly results and an outlook that topped Wall Street estimates, but revealed that TikTok was the company’s single largest customer, accounting for 12% of revenue. Fastly is a so-called “edge-based” cloud-computing platform that allows developers to get the best possible performance from their applications.

TikTok has come under fire from President Donald Trump, who has suggested banning the service as a national-security risk because of ownership by the Chinese company ByteDance. Trump has also suggested that the U.S. Treasury should get a cut of the purchase price if TikTok is acquired by Microsoft Corp.
MSFT,
+0.90%
.
Also of note, organized TikTok users were credited with helping to wildly inflate attendance expectations of Trump’s ill-attended Tulsa, Oklahoma rally back in June.

Even with Thursday’s drop, Fastly shares have soared 324% from their opening on the New York Stock Exchange in May 2019, with shares skyrocketing 294% in the past three months. In comparison, the tech-heavy Nasdaq Composite Index
COMP,
+0.64%

has gained 25% in the past three months, and the S&P 500 index
SPX,
+0.36%

has risen 17%.

Oppenheimer analyst Timothy Horan downgraded Fastly to perform from outperform and said TikTok was a “major risk” to the elevated stock price.

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

For the third quarter, Fastly forecast an adjusted loss of a penny a share to net income of a penny a share on revenue of $73.5 million to $75.5 million. Analysts, who had previously forecast a loss of 4 cents a share on revenue of $72 million on average, now expect earnings of a penny a share on revenue of $74.8 million.

Read:Facebook’s TikTok rival comes as Chinese company’s future is in limbo

William Blair analyst Jonathan Ho, who has an outperform rating on the stock, said weakness could make a good entry point given its recent performance, even with a possible U.S. ban of TikTok.

“Third-quarter guidance calls for sequentially flat revenue growth, which appears conservative but also reflects some unknowns around TikTok and continued COVID-19-driven demand as global economies reopen,” Ho said. “Fastly remains a stock we would want to own given broader themes around digital transformation and edge compute, and we would take advantage of weakness in the shares.”

Raymond James analyst Robert Majek, who rates the stock as market perform, said TikTok “remains a double-edged sword” for Fastly.

Majek said one “area of perceived softness” in Fastly’s results was slowing growth in its large enterprise customers, which could reflect a COVID-19 related pullback in spending, but noted the addition of a very significant customer.

“We note that the gross adds included one very meaningful customer, Amazon
AMZN,
+0.55%
,
which we believe is using Fastly to deliver ~90% of its image content across the 20 global cities we tested,” Majek said.

Stifel analyst Brad Reback, who has a buy rating and hiked his price target to $98 from $30, noted that while 12% of Fastly’s revenue came from TikTok, half of that came from outside of the U.S., and that digital transformation trends, prompted by COVID-19 adaptation, would drive more organizations to “re-platform their applications” using Fastly.

“The banning of the app in the US would create short-term uncertainty around Fastly’s revenue contribution from ByteDance; however, management believes it has the ability to backfill the majority of this potentially lost traffic,” Reback said.

Of the 11 analysts who cover Fastly, five have buy or overweight ratings, four have hold ratings, and two have sell ratings, and an average target price of $93.25, according to FactSet data.



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Zoom and Slack are worth nearly $50 billion more since coronavirus hit, and now we see the results


The COVID-19 outbreak brought waves of new users to Zoom Video Communications Inc. and Slack Technologies Inc., but this week we find out how many are actually paying for the services, and how much it is costing the companies to support them.

Zoom
ZM,
+13.74%

will report quarterly earnings Tuesday afternoon, after announcing in April that it had topped 200 million “daily meeting participants” — 20 times more than its record at the end of last year — as companies and schools around the world rushed to adjust to widespread remote work. Slack
WORK,
+6.07%

Chief Executive Stewart Butterfield has already disclosed to MarketWatch that “simultaneously connected” users on his software grew by 25% in a single week in March, and that Slack added 80% more many paying customers in two months than it had in full previous quarters. Slack reports Thursday afternoon.

Since both companies offer free plans with more limited feature sets, it’s still unclear just how well Zoom and Slack are capitalizing on work-from-home trends financially, even as their shares have soared in recent months. And both have had to secure the computing power necessary to support those users, adding costs that will eat into Zoom’s potential profit and further erode Slack’s losses.

For more: We need tech more than ever, but that doesn’t mean we are willing to pay for it

The results will put nearly $50 billion in freshly minted valuations to the test. Zoom’s market capitalization crossed the $50 billion mark on its own for the first time Friday, and shares — which sold for $36 in its 2019 initial public offering — closed higher than $200 for the first time Monday. Slack is trading for its highest prices since the stock debuted last June, and is now worth more than $20 billion after riding up 65% so far in 2020. Combined, the two stocks have added roughly $48 billion in market cap since the beginning of the year, which tops the entire valuations of other prominent cloud-software names like Workday Inc.
WDAY,
-2.98%

and Atlassian Corp.
TEAM,
+1.63%

Zoom has not emerged from its sudden success unscathed. Look for Chief Executive Eric Yuan to address any fallout from safety and security lapses on its platform after Zoom began facing heavy backlash in March about its encryption claims, as well as default settings that allowed those who weren’t hosting a meeting to share their screens and potentially broadcast inappropriate messages.

For more: Zoom Video lurches from boom to backlash amid privacy issues, ‘Zoom bombing’ attacks

The criticism prompted some companies to ban the use of Zoom for corporate purposes. The New York City Department of Education also stopped using Zoom, though the school system eventually came back to the service with new security features, such as letting meeting hosts mute participants without giving them the option to unmute. Zoom ultimately made changes to its default settings for all users, clarified its encryption policies, and prioritized security improvements within its feature-development teams.

“We now have a much broader set of users who are utilizing our product in a myriad of unexpected ways, presenting us with challenges we did not anticipate when the platform was conceived,” Yuan said in an April blog post, one of a number of public writings about the company’s response to the backlash.

So how many companies did stop paying for Zoom as a result of security issues and Zoom-bombing scandals? Cantor Fitzgerald analyst Drew Kootman doesn’t believe it will be important.

“We do not expect a material impact from recent privacy/security issues as we believe the company is taking appropriate steps to improve the problem,” he wrote in an April note to clients.

Zoom’s rivals in video meetings have also pointed to big spikes in activity in recent months: Alphabet Inc.
GOOGL,
+0.09%

GOOG,
+0.20%

disclosed that its Meets platform has seen a “thirtyfold increase” in usage since January, and Cisco Systems Inc.
CSCO,
-3.17%

said Webex was running at three times its February capacity. Microsoft Corp.’s
MSFT,
-0.22%

Teams saw “more than 200 million meeting participants” in a single day during April.

For more: Microsoft adds as many users to Teams in a week as Slack has in total

Teams is seen as a direct competitor to both companies, but especially Slack, with its ability to offer a similar text-based service and video meetings to corporate clients who may already have access through their corporate Microsoft Office cloud-software packages. Slack may have a more youthful vibe in the world of enterprise messaging apps, but still trails behind Teams in terms of its user base.

MKM Partners analyst Rohit Kulkarni believes there is room for multiple services to thrive in the market.

“The likelihood of a ‘winner takes most’ competitive dynamic outcome in the enterprise collaboration software market is quite low,” he wrote. Kulkarni models 19,000 paid net additions for the fiscal first quarter, compared with 22,000 for the entirety of Slack’s last fiscal year.

See also: Slack CEO details ‘most productive’ week in company history, hits back at Microsoft

Slack will be joined Thursday afternoon by DocuSign Inc.
DOCU,
+5.35%

, which should also be benefiting from at-home trends due to growing need for e-signatures on legal documents. Other software companies expected to report earnings this week include CrowdStrike Holdings Inc.
CRWD,
+8.00%

, Smartsheet Inc.
SMAR,
+2.87%

, Cloudera Inc.
CLDR,
+6.92%

, Guidewire Software Inc.
GWRE,
+3.75%

, MongoDB Inc.
MDB,
+2.70%

and PagerDuty Inc.
PD,
+5.49%



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