Fastly Stock Tumbles 25%. Here’s What Wall Street Is Saying.

Fastly added that in the latter part of the quarter “a few customers” had lower usage than expected.

Fastly now expects revenue of $70 million to $71 million for the quarter ended September 30, down from a previous range of $73.5 million to $75.5 million. The company will report detailed results October 28.

Keep in mind that Fastly shares have had a ferocious rally, with a year-to-date gain at the recent peak of about 500%. At Thursday’s price, a little under $90 a share, the stock is trading about where it was in late September before a head-scratching 50% rally from mid-September to mid-October. The stock was ripe for a sell-off, which helps explain why a $3 million revenue miss has triggered a loss of more than $3 billion in market cap.

The warning late Wednesday triggered a flurry of cautious commentary from the Street.

Stifel analyst Brad Reback on Thursday cut his rating on Fastly shares to Hold from Buy, with a new target of $77, down from $98. Reback notes that TikTok accounted for $9.7 million of Fastly’s Q2 revenue, according to the company’s most recent 10-Q filing with the SEC, about half of that from its U.S. arm.

“We are surprised usage has slowed so much, especially given the app remains fully available in the U.S.,” Reback writes. “Moreover, what is even more concerning is that Fastly is seeing slowing usage at several other larger customers.” He wonders if the issues with other customers involved competitive risks—or macro weakness.

Reback adds that he doesn’t think Fastly’s warning carries bad portents for other tech companies. “We do NOT believe its commentary regarding reduced usage at some customers late in the quarter is indicative of a broader slowing in demand for consumption-based infrastructure vendors,” he writes. “In fact, our checks continue to point to strengthening usage patterns for cloud-based infrastructure software platforms, and we expect better than expected September prints from the likes of Microsoft (MSFT), Datadog (DDOG) and JFrog (FROG).”

Citi’s Walter Pritchard repeated his Sell rating and $58 price target on Fastly shares. “We’ve had the view that the market is simply paying too much for the lack of visibility in Fastly’s transactional / usage-based business model,” he writes in a research note. “We expect Q3 will cement that concern and result in significant de-rating of the stock from recent highs. The Q3 guide was already viewed as conservative with respect to TikTok and the broadening of weakness will also likely catch investors by surprise.”

Oppenheimer’s Timothy Horan notes that the stock after the recent rally was ripe for a fall. “The company really needed to hit on all cylinders to justify this valuation,” with the stock recently trading for more than 28 times estimated 2021 revenues. “Long-term, we are positive that Fastly is building a unique cloud edge platform that will support the next decade of compute and Internet-delivered applications. However, we remain Perform-rated due to valuation.”

A few analysts rallied to the stock’s defense.

William Bair analyst Jonathan Ho maintains his Outperform rating on the stock. He thinks the warning does not change the long-term story for Fastly. “While we expect investors to be concerned about the volatility and large customer dependency, we believe that the company’s longer-term opportunities in edge computing, security, and digital transformation remain unchanged,” he writes in a research note. “In our view, the reaction to the disappointing news simply resets the stock to roughly the trading range it was in prior to the unexplained run-up in shares over the past few weeks.”

Likewise, Raymond James analyst Robert Majek repeated his Outperform rating on the stock. Majek theorizes that the issue might involve TikTok switching to a higher level of data compression that could have reduced their bitrate consumption “and could provide some reassurance for investors.” He adds that he “[hasn’t] lost any confidence in Fastly’s level of performance and product differentiation that should drive sustainable share gains and growth over time.”

Fastly shares have fallen 27%, to $90 — that’s down from Tuesday’s recent closing high of $128.83—but up from about $20 and the end of 2019.

Write to Eric J. Savitz at eric.savitz@barrons.com