Shares of Fastly(NYSE: FSLY) tumbled close to 35% this week, according to data from S&P Global Market Intelligence. The edge cloud computing platform posted more revenue growth in the first quarter of 2024 but can't seem to generate a profit, which is likely frustrating shareholders. As of Friday, May 3, the stock is off 93% from all-time highs set during the 2020 pandemic stock market bubble.
Here are the details on why Fastly stock was sinking yet again this week.
Slow growth, no profits
Fastly is an edge computing platform that also offers IT departments security and analytics services. Edge computing means cloud computing and hosting performed closer to the end customer, which theoretically improves loading times and customer experiences. With the recent boom in artificial intelligence (AI) spending, Fastly should have been a growth beneficiary in recent years.
So far, this is proving true, at least on its top line. Revenue grew 14% year over year last quarter to $133.5 million. However, it is still struggling to generate any sort of bottom-line profitability. Fastly had an operating loss of $46 million in Q1, which is right around the same loss it posted in Q1 of last year. This is an ugly-looking negative 34% operating margin, a margin that hasn't improved much in recent quarters. Fastly has to spend a lot on research, marketing, and other overhead costs in order to get its edge computing products sold. It can't seem to do so in a profitable manner.
There is also a major concern with all of its stock-based compensation. Fastly's shares outstanding are up 50% since going public as it gifts tons of stock to employees and executives. This dilutes the ownership stakes of outside investors and destroys shareholder value. With no signs of Fastly slowing its stock compensation, this will likely continue to be a headwind for investors.
Where does the stock go from here?
A stock that doesn't ever generate a profit is worth nothing. Zero. And this seems to be the reality Fastly is living in. Even though we are in a cloud computing and AI boom, it is only growing revenue 14% year over year (slower than behemoths like Amazon Web Services) and is severely unprofitable. There are no indications these losses will turn around anytime soon, either.
If Fastly keeps posting operating losses, the stock will keep going lower. Unless this changes, Fastly is a stock individual investors will want to avoid owning.
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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Fastly. The Motley Fool has a disclosure policy.
