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Despite Skepticism, Fastly’s CDN Business Is Still Relevant

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While the novel coronavirus pandemic had a terrible impact on several market segments, specialists in CDNs (content delivery networks) like Fastly (FSLY) enjoyed remarkable success.

Initially, FSLY stock absorbed a hit during the outbreak’s onslaught, and was down by about 39%. Although the drop was steep, Fastly fared far better than other companies. Fortuitously, FSLY’s core business remained highly relevant as the economy slowed.

CDNs, which are geographically distributed groups of servers that provide quick and streamlined delivery of internet content, essentially bring data closer to the source of demand. Given the size of content that travels through cyberspace nowadays, it is no longer possible for one centralized server to feed requests coming from all over the globe. CDN providers like Fastly expand the data stream’s surface area, facilitating conveniences such as faster downloads and more reliable streaming.

Demand for CDNs will only increase, irrespective of the potential lingering impact of the COVID-19 crisis. As innovations such as the Internet of Things draw more data usage demand, the current infrastructure will prove inadequate to accommodate everyone’s needs, and CDN expansion will be necessary. Plus, applications from the crucial to the mundane will increase in scope: from cloud computing to streaming video game platforms, online usage will increase pressure on already strained networks.

An Interesting Case For Contrarians

Despite the fundamentally supportive narrative for Fastly’s products, the stock got off to a less auspicious start to the new year than in 2020: it is down 29.3% year-to-date. This may be largely due to investor sentiment waning as COVID-19 cases decline sharply from their peak levels. Many investors believe that people will return to their regular work and school schedules, leaving less time for online activities, thus reducing the need for CDNs.

Raymond James analyst Robert Majek has taken this stance, noting that slowing traffic on Fastly’s network confirms the theory that the company may have benefitted from a one-off catalyst, the COVID-19 restrictions. Majek downgraded FSLY to Market Perform from Outperform last week. (See Fastly stock analysis on TipRanks)

Clearly, investors have so far sided with the analyst, as Fastly shares hang below the 50-day moving average. Also, it appears that FSLY has formed what technical analysts refer to as a bearish pennant formation.

A bearish pennant formation occurs after a steep correction. A stock may enter into an ever-tightening consolidation phase as bulls and bears attempt to control its trajectory. Finally unable to muster any more upside support, the bulls give up, leading to huge profits for short traders. Based on the present overriding negativity, it is possible, and perhaps even likely, that FSLY stock will suffer another downside move.

Should that occur, contrarians may view the discount as a buying opportunity. That’s because technology only advances while consumer expectations for speed and reliability increase. On this dynamic alone, Fastly provides a mission-critical service.

Additionally, the COVID-19 crisis is far from over in terms of the need for CDN. According to the New York Times, several blue-chip firms are reluctant to state hard deadlines by when their employees will return to the office. Many expect to accommodate a hybrid approach until the coast is truly clear.

Finally, many consumers will continue to stream their entertainment, sparking demand for CDNs, which will boost Fastly’s stock. A Morning Consult survey revealed that only 41% of U.S. adults feel comfortable sitting in movie theaters. While this indicates a significant rise from the pandemic lows, it is also emblematic of lingering fears associated with COVID-19 infection.

FSLY is trading at $61.72, with an average analyst price target of $78.50 implying a 27% upside potential. Turning to TipRanks’ analyst rating consensus, Fastly is considered a Hold, based on 1 Buy, 4 Holds, and 1 Sell.

A Speculative Proposition To Keep On Your Radar

Of course, Fastly is not the only CDN provider in town, and one of the fundamental risks to FSLY is competition. Add to that the concern that the COVID-19-driven market is waning for Fastly, and investors might decide to stay away.

Nevertheless, contrarians will take encouragement from the fact that many people are still hunkering down at home. While millions of Americans have resumed their normal schedules, a great many have not. More time at home means more time online, which is a boon to CDNs like Fastly.

In the immediate future, FSLY stock is risky due to the prevailing pessimistic sentiment. However, once the smoke clears, it may be an exciting investment opportunity.

Disclosure: On the date of publication, Joshua Enomoto did not have any positions in the securities mentioned in this article.

Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.

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