Fastly (FSLY Quick QuoteFSLY - Free Report) is a $6 billion provider of infrastructure software that powers cloud computing, image optimization, security, edge computer technology and broadband streaming solutions. They are considered part of a cloud niche called Content Delivery Networks, or CDNs.

The company was an emerging cloud darling last year as demand for its services greatly expanded during the pandemic's work-from-home epidemic. Big customers like TikTok and Amazon had adopted Fastly's high-bandwidth capabilities and shares traded above $120, sporting a big cap valuation of nearly $15 billion, with projected sales of only $300 million.

But the earnings outlook started to turn negative after its Q4'20 report in February and shares fell back to $60 during the March stock market slump. Q1'21 was worse and shares dropped 27% on May 6 on 32 million shares.

Then June brought the real calamity in the form of a network outage which may have caused a major customer to go elsewhere. On Tuesday June 8, several news outlets reported that countless websites suffered a brief outage due to a glitch at the popular CDN provider.

According to TechCrunch, Reddit, Spotify, Quora, PayPal (PYPL Quick QuotePYPL - Free Report) , Vimeo, Shopify (SHOP Quick QuoteSHOP - Free Report) , CNN, The Guardian, The New York Times, BBC and Financial Times were among websites that faced the outage.

Outlook Softens Again

Here's what I wrote in August for my FSLY Bear of the Day article, following the company's Q2 report...

EPS estimates just got slashed again in the last week following their Q2 earnings report on August 4, with the 2021 profit consensus cratering 47.6% from a loss of 42 cents to -62 cents, representing a -244% annual wipeout.

And next year's outlook imploded a whopping 85% from a loss of 26 cents to -48 cents.

One thing that stood out about the August 5 price action was another big drop to new 52-week lows below $35 on massive volume of 50 million shares. It looked like capitulation of the last FSLY bulls to me, and I started getting interested in a potential turn-around.

Analysts Throw in the Towel

Part of that capitulation was due to big overreactions from the spreadsheet jockeys...

Craig Hallum on 8/5: Analyst Jeff Van Rhee lowered the firm's price target on Fastly to $42 from $55 and kept a Hold rating on the shares. He acknowledge the in-line quarter, but adjusted his model estimates downward because the company missed so meaningfully on the forward guide.

DA Davidson on 8/5: Analyst Rishi Jaluria downgraded Fastly to Neutral from Buy with a price target of $33, down from $60. The analyst cited the company's Q2 revenue miss and reduced FY21 guidance as June outages resulted in a top-10 customer and several others pulling all traffic from its network. Jaluria also noted management's commentary that there have been delays in those same new customer ramps this quarter, unrelated to the June outage.

Citigroup on 8/5: Analyst Tyler Radke lowered the firm's price target on Fastly to $33 from $46 and kept a Sell rating on the shares. Fastly's "challenging 2021 worsened considerably" with the Q2 results that fell well short of expectations on nearly every metric. The company's usage-based model has shown its downside and unpredictability, and with significant fallout from the outage, it could take multiple quarters to correct, according to Radke.

William Blair on 8/5: Analyst Jonathan Ho downgraded Fastly to Market Perform from Outperform without a price target. Fastly reported a "subpar quarter, impacted by a service outage in June that led the company to issue credits, a top 10 customer departure, and slower ramp-up of existing traffic." Ho also noted that Fastly saw an unrelated slowdown in onboarding of some new customer traffic. Given the "uncertainty and unpredictability in the business," he believes the stock is likely to remain range-bound over the medium term as management "has a lot of work to do to rebuild credibility."

Piper Sandler on 8/5: Analyst James Fish lowered the firm's price target on Fastly to $32 from $45 and kept a Neutral rating on the shares. "The stock is down 20% post-earnings following only an inline quarter, weaker than anticipated organic trends given the June outage, and Q3 and 2021 guidance missing by 15% and 10%, respectively."

Get Ready to Buy FSLY

This week I started a very small position in FSLY after the company announced a new patent and shares surged over 10% to reach above $50. The company was granted a US patent titled "Load balancing across origin servers."

I'm looking forward to the company's Q3 report on November 3 because it will either confirm the bottom is in, or give me a chance to build a bigger position near $40.

The price and volume action certainly since May seem to suggest the worst selling is over, with a higher low near $37 in early October. Now we just have to see if analysts reverse their bearishness.

And in other supportive catalysts, on September 8 Evercore ISI put out a research note suggesting Akamai, Cloudflare, and Fastly may partner with Apple on its new service.

After Apple's (AAPL Quick QuoteAAPL - Free Report) recent announcement of its Private Relay service meant to offer enhanced security to iOS users, Evercore ISI analyst Amit Daryanani said he thinks the news is "notable and could be a positive for multiple companies."

The analyst believes that Apple has partnered with Akamai, Cloudflare (NET Quick QuoteNET - Free Report) and Fastly on the new iCloud+ Private Relay service, but he has "no sense on specific allocations" for each vendor.

Daryanani estimates that the traffic running through Private Relay could generate about $8 to $20 million in revenues in FY22 and views Private Relay as "an incremental positive for all companies involved."

Here's what I told my TAZR Trader group in the Buy Alert this week...

Portfolio is starting a very small starter position in Fastly (FSLY Quick QuoteFSLY - Free Report) under $50. We will add under $45 and $40 if those scenarios evolve. Basically, we take low risk now to get our keen attention and focus on the turn-around. And we add bigger if/when we get confirmation into their Q3 report on Nov 3.

Wall Street has grown to hate this tech growth stock after loving it too much last year. The summer outage for this streaming bandwidth provider didn't help.

I wrote about the growth implosion in my August Bear of the Day after their Q2 report. But here's what I said as I started licking my chops about the potential opportunity...

There seemed to be something of a capitulation-type move after last week's report with shares plunging to new 52-week lows under $35 on massive volume of 50 million shares, and then recovering $40 as if the worst might be discounted.

So I wouldn't blame you if you started to nibble under $40. I'm thinking about it myself with revenue growth still intact at 19% and looking to eclipse $400 million next year for a 12X forward sales multiple.

Unfortunately, we could never pull the trigger on FSLY near $40 because the stock remained trapped in the cellar of the Zacks Rank.

Well now somebody is accumulating, as Tuesday's 10.7% pop on 7.7 million shares will attest. The catalyst was news that the company was granted a US patent titled "Load balancing across origin servers."

And look how far behind Wall Street analysts are behind any recovery in this now Zacks #2 Rank...

I'm thinking the bottom is in for FSLY.

But I don't want to go all-in yet until we get analysts reversing and/or we get through the company's Q3 report and outlook.

(end of TAZR Buy Alert excerpt)

Still Doing the Volume

I perused the Fastly website this morning and they claim to be still moving small galaxies of data and content with 420 billion images optimized and delivered per month, 15 trillion log lines delivered per month, 800 billion requests per day, and greater than 95% customer satisfaction.

It's worth noting that Stripe, the next huge fintech IPO, is also a Fastly customer, according to the company website.

With FLSY shares at $50, it is now trading about 14 times next year's sales consensus of $405 million.

We'll know in a couple of weeks if customers like Apple and TikTok have had their faith restored and the growth rate for Fastly can reemerge above 20%.

Disclosure: I own shares of FSLY for the Zacks TAZR Trader portfolio.