Software company Fastly (NYSE:FSLY) had a rough month of October where its share price cratered as underwhelming results for the third quarter were a cause for concern for investors. The company's sales numbers were below the guidance it previously issued as it said it faced "customer-specific challenges." The customer the company's alluding to is TikTok, which the U.S. government's been looking to ban out of concerns for its close ties to the Chinese government. And while there is a potential deal that could solve all those concerns involving Oracle (NYSE:ORCL) and Walmart (NYSE:WMT), there's no guarantee that will pan out.
As long as TikTok's under a cloud of uncertainty, so too is Fastly, which generates more than 10% of its sales from that one customer.
Although Fastly still recorded 42% sales growth in Q3, that wasn't enough to get investors excited about its future. The company needs to keep growing in order to justify its lack of profitability and high valuation. Through the first nine months of the year, Fastly's incurred losses of $50.2 million, up 34% from the same period last year.
Today, Fastly trades at around 30 times revenue and 14 times its book value. A year ago, investors were only paying 13 times revenue and at more than eight times book value for the stock. Still up over 215% year to date, Fastly's starting to lose steam and unless there's positive news surrounding TikTok, its stock may continue falling further down.
Despite the strong growth numbers, Fastly's high valuation and risk related to TikTok make it a stock that investors should avoid, at least for now.
