Fastly shares were down sharply Monday after Morgan Stanley analyst Sanjit Singh cut his rating on the content delivery network provider to Underweight from Equal Weight, citing both “execution risks” and slowing internet traffic growth.
Singh slashed his price target on Fastly (ticker: FSLY) shares to $12, from $18, and cut his earnings and revenue estimates for Fastly for both this year and next year.
Singh sees multiple issues. It starts with what he says is growing evidence of a slowdown in the enterprise software spending environment. He suggests investors take a cautious approach on companies with consumption pricing models.
Singh notes that after benefiting from an internet traffic surge during the early stages of the pandemic, Fastly’s growth has been decelerating, reflecting a normalization of traffic trends and a network outage in 2021, among other factors.
The analyst sees trouble for Fastly in the second half, including weakening demand in key end markets, in particular e-commerce and media.
Singh also expects intensifying competition, as new players enter the market, including Google. He also sees risks of organizational disruption, as Fastly continues to look for a new CEO after the recently announced planned departure of current chief Joshua Bixby.
Singh also points out that Fastly has significant exposure to tech start-ups, “which increases the risk profile during a downturn if these customers struggle to finance operations. ”
Singh’s downgrade on Fastly shares was part of a broader shift to a more cautious stance on infrastructure software stocks.
He cut his rating on DigitalOcean (DOCN), a provider of cloud computing services to small businesses, to Underweight from Overweight, with a new target of $45, down from $61. And he reduced his rating on New Relic (NEWR), which provides IT network “observability” software, to Equal Weight, from Overweight.
“While multiple contraction due to rising rates and inflation concerns weighed on share performance across infrastructure software in Q4 and into Q1, the demand picture for software remained healthy,” he writes. “Heading into Q2 results, our channel conversations picked up signals of slowing demand across the sector.”
The analyst finds pockets of weakness in Europe, the small business sector, and companies with exposure to start-ups and e-commerce.
He suggests focusing on software companies that primarily serve large enterprises—and with subscription rather than consumption revenue models, in particular ServiceNow (NOW), Alteryx, Appian (APPN), and JFrog (FROG).
Fastly shares have tumbled 13.8%, to $11.64, DigitalOcean is 13% lower at $40.26, and New Relic is off 4% at $54.05.
Write to Eric J. Savitz at email@example.com