I posted the following on the premium board and decided to share it here even though it lacks a little context (original post if you have access: https://discussion.fool.com/4056/fastly-is-currently-223-of-my-p…). The thread was wide ranging from questions about earnings to portfolio management and holding periods, which is why my reply covers such wide ranging topics. Hopefully I kept it mostly within Fastly and some lessons I’ve had reenforced recently by doing exercises here. Please comment on my commentary as this is all in the name of becoming a stronger investor myself and as a community. I’m sure some of you will see your work and opinions echoed in my words, such is the quality of the people around here!
Fastly is currently 22.3% of my portfolio. I bought a little more this morning after it was already up 11% TODAY. It closed just over 15.5% today.
Frankly I don’t care about the price or what it did today or where I bought it yesterday. Such concerns are about market timing and price anchoring respectively. It is hard to ignore the market and the price and instead focus on the company and its real performance. When i say “hard” I really mean it. I saw +11% when I sat down to sell out of COUP and put some of those funds in to FSLY. I fought through my initial mental reaction to seeing that move when approaching the “buy” button. In the end I am not playing that game. I hit “buy”. Why?:
(Combine the following with the well known advantages that allow Fastly to continue to win customers over other solutions for many important use-cases)
Fastly is usage-based. During this quarter that will be of extra benefit due to increased traffic at customers like Amazon.com and Shopify (which itself grew revenue by 98% YoY with a large chunk of this also usage based through various channels). It stands to reason that Fastly is going to produce a surprising amount of usage…which means revenue. (Note this is not true of Cloudflare (NET) which I also own. They use seat-based pricing and it is hurting them right now; for now)
Fastly’s Gross Margin was only 57.6% last quarter. This isn’t as high as I’d like for many SaaS companies but unlike some pure SaaS companies Fastly has a hardware/physical component as they expand their network (PoPs). I suspect we may see the GM jump up this quarter if they had to slow down network expansion reinvestment due to shelter-in-place orders. This is just speculation though.
Most investors probably think of Fastly as JUST a CDN provider. They sure are a premium provider of CDN, which HAS been the primary driver for their business. In reality they have achieved this success by building a CDN application on top of their programmable network. The future at Fastly is in Compute@Edge. This productized version of what they are doing has been in testing and is rolling out in the later part of this year. I don’t want to go too far down a rabbit hole here. The short version is they are participating in a revolution that is bringing WebAssembled applications (something your browsers have been using since 2017) to all devices including the cloud (WASM + WASI). They have written a compiler and runtime that allows developers to take code they have written in their favorite programming languages and compile an application to run on Fastly’s edge network (or any device, in theory). These application instances can run thousands to a process but are still isolated for security, spin up super fast and with very little system resource overhead compared to competing container-based or server-less solutions. Read more: https://www.infoq.com/news/2019/04/wasi-wasm-system-interfac…
#1 and #2 are going to hit a home run tomorrow night when they report earnings. #1 and #3 are what keep Fastly in my top couple of companies by conviction (others are ZM, CRWD, DDOG). As always, we have no idea what the market will do (as others have posted here). I said they would hit a home run but I am talking about the fundamentals not the price. The real numbers that give us a window in to the business heath. I wouldn’t be surprised at all to see Fastly report >60% YoY revenue growth, which would be a lot higher than their recent report of “just” 38%. We may very well see GM over 60% as well, which would all make it very likely that they are in positive EPS territory, something the general market cares about (I don’t, because if revenues are high and GM is improving this is inevitable and a side-effect of being a good company)
You may think I’m crazy to add to a company when their price has gone up so much and I already have a large position but it is pretty simple in my eyes: When a company is growing fast, what looks expensive today is not tomorrow. There are only two eventualities:
a) The price stays the same and the valuation metrics make it look cheaper and cheaper or
b) the price goes up keeping the metrics even
(ignoring multiple expansion/contraction here)
This is the reason behind the Foolish and famous point by Benjamin Graham, “In the short run, a market is a voting machine, but in the long run it is a weighing machine.” Prices will move around but they always move in the direction of the fundamentals eventually. Add hyper-growth to the mix and today’s price really doesn’t matter. Hesitation can come with opportunity cost in compounding returns though! I’m sure you’ve heard over and over around the Fool about how people missed out on something, usually Amazon or Netflix is cited, because they looked “expensive”. What those people constantly miss is that growth deserves to be expensive because it is hard to grow a business year after year at a high rate and the companies grow in to the valuation. If you ever see a company you think is fast-growing that is also “cheap” you should be concerned that you missed something, not excited.
Since time horizon was also mentioned in this thread with numbers like “10 years” I want to temper expectations a little with another point. Companies can not grow at high rates forever. This is why I always say I “buy TO hold”, not “buy AND hold”. What I mean is. I always buy a company with the idea I will hold it forever. I am not trying to time the market or bet on catalysts or any such fancy “move”. I would love to hold Fastly forever but at some point things will change. It could happen in a year (perhaps a competitor arrives with a different approach for computing at the edge) or in several years (perhaps they are the market winner and saturate the market, and they can’t innovate…both of which seem unlikely to me with a growing TAM and being at the forefront of innovation). The point is, at some time in the future, things with change and growth will slow. It could indeed be over 10 years, but it really could be next year. I don’t know the future. I can only take it quarter by quarter because that is when the company tells me new facts to consider.
Something I forgot to mention in the other post is that if Fastly’s price does get knocked out of the park I am probably going to reduce the position size. This is my largest holding, ever. While I’m not feeling particularly uncomfortable about that fact right now I do plan to re-evaluate the situation after I have a chance to process their results and comments. I’m in new territory here so I am giving myself permission to change my mind about letting this winner run versus proportionality balancing.