It's one thing for a richly-valued company to deliver a sales warning. It's another thing for such a company to warn right after its stock has risen 30% over the prior two weeks, in the absence of any significant positive news hitting the wires.
That's the scenario that just unfolded with Fastly (FSLY) , which is giving back all of those two-week gains after issuing a Q3 sales warning. The company blamed both weaker-than-expected usage from its biggest customer (TikTok) due to geopolitical drama, along with (perhaps more troublingly) lower-than-expected usage among a few other customers.
With Fastly carrying an enterprise value equal to 31 times its 2021 consensus sales estimate prior to its warning, it's easy to grasp why markets are responding so harshly to the news. But at a time when so many other high-growth tech companies are also sporting nosebleed valuations, it is worth taking a hard look at how unaware (to put it politely) those investors who bid up Fastly to such steep multiples in recent weeks apparently were about how the company was performing, as well as the competitive risks it faced.
As I discussed a few weeks ago, high-growth tech names such as Zoom (ZM) , Peloton (PTON) , Snowflake (SNOW) and Twilio (TWLO) have increasingly become valued as if they have no credible competition to deal with, when they clearly do. The same arguably held true for Fastly, whose edge content delivery, security and cloud infrastructure services face competition from both public cloud giants and the likes of Cloudflare (NET) and Akamai (AKAM) .
Moreover, unlike with a Zoom or Snowflake, the case for declaring Fastly to have best-of-breed offerings for its core markets has often felt very debatable. Cloudflare (admittedly also a very richly-valued company) has innovated quite a lot with its security and edge computing offerings, and Microsoft (MSFT) and Amazon.com (AMZN) have put a lot of work into developing edge services that complement services delivered from their primary cloud data centers.
Also: As much as Fastly has marketed itself as an "edge cloud platform," its gross margin (61.7% in Q2) has been pretty consistently below Cloudflare and Akamai's, both of which have GMs north of 75%. That suggests Fastly is more dependent than rivals on lower-margin content delivery services.
Nonetheless, investors were eager to bid Fastly up to the stratosphere in recent weeks. And that in turn is perhaps a clear warning sign that the major run-ups seen lately by many other high-multiple tech stocks also aren't linked to any kind of informed, hard-headed analysis of how these companies are positioned and performing.
Rather, the gains seem to have a lot to do with hot money (both retail and institutional) crowding into names because others are also crowding into them. Throw in short squeezes, aggressive options bets and stimulus hopes, and you have a recipe for multiple inflation begetting even more multiple inflation. For a while, anyway.
To be sure, it doesn't look likely at this point that a ton of other high-multiple tech firms are going to share bad news over the next few weeks that's similar to what Fastly just delivered. While Fastly warned, a slew of other richly and not-so-richly valued tech companies, including Twilio, Alteryx (AYX) , NXP Semiconductors (NXPI) , STMicroelectronics (STM) and Model N (MODN) , have raised their calendar Q3 guidance over the last few weeks.
Q4 is still shaping up to be a strong quarter for many tech companies -- particularly ones with healthy exposure to consumer spending fields such as e-commerce and gaming. And just maybe we'll see the passage of a stimulus bill that adds more fuel to the fire.
But whether it's sharing good or bad short-term news, every company still has its fair price. And what happened with Fastly in the weeks before its warning is a cautionary sign of how many recent stock moves have had nothing to do with assigning fair prices to companies based on what they do and don't have going for them.