Fastly, Inc.'s (NYSE:FSLY) 26% Share Price Surge Not Quite Adding Up

Fastly, Inc. (NYSE:FSLY) shares have continued their recent momentum with a 26% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 26%.

In spite of the firm bounce in price, you could still be forgiven for feeling indifferent about Fastly's P/S ratio of 2.3x, since the median price-to-sales (or "P/S") ratio for the IT industry in the United States is also close to 2.7x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

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See our latest analysis for Fastly

How Fastly Has Been Performing

Recent times haven't been great for Fastly as its revenue has been rising slower than most other companies. It might be that many expect the uninspiring revenue performance to strengthen positively, which has kept the P/S ratio from falling. However, if this isn't the case, investors might get caught out paying too much for the stock.

Keen to find out how analysts think Fastly's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Some Revenue Growth Forecasted For Fastly?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Fastly's to be considered reasonable.

If we review the last year of revenue growth, the company posted a worthy increase of 7.4%. The latest three year period has also seen an excellent 47% overall rise in revenue, aided somewhat by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 6.7% each year as estimated by the nine analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 20% each year, which is noticeably more attractive.

With this in mind, we find it intriguing that Fastly's P/S is closely matching its industry peers. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

The Final Word

Fastly appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

When you consider that Fastly's revenue growth estimates are fairly muted compared to the broader industry, it's easy to see why we consider it unexpected to be trading at its current P/S ratio. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

It is also worth noting that we have found 2 warning signs for Fastly that you need to take into consideration.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.