Can we call it quits on FSLY v. NET?

PhatGus · November 6, 2020, 6:18pm

Hey all,

First and foremost: if this post is either unhelpful to the board otherwise inappropriate, please feel free to remove.

I’d like to suggest we end the FSLY v. NET threads that seem to serve as more of a “I was right, told you so” purpose than one of new analysis which we haven’t already discussed. For whatever reason the discussion around these two seems to have been more emotional than most, and at least here in the States we’re getting enough “I’m good and if you disagree you’re bad” right now as it is.

I want to be clear: I’m not calling out anyone in particular; that’s not remotely my intention and I apologize profusely if it comes across that way. I would just hate to see anyone feel unwanted/undervalued in a community that provides quite literal family tree-changing value to so many of us (Saul, our undying thanks), or even worse lose members.

Thanks to everyone who makes this such a great place.
-Scott

rdgyy · November 6, 2020, 6:40pm

Hi Scott,

I find the posts practical since it helps you understand the principles based on which Saul operates, with actual evidence of why certain decisions are made. It’s all about the $, not about who is right or wrong.

MoneySlob · November 6, 2020, 8:58pm

I find the posts practical since it helps you understand the principles based on which Saul operates, with actual evidence of why certain decisions are made. It’s all about the $, not about who is right or wrong.

Me too. So many experts after the fact.

FSLY had legal requirement to post that they weren’t doing so good. This wasn’t your standard ER preview, it came out of nowhere. If I had read it I would have bailed. But I didn’t and Saul did and only after reading Saul’s post did I sell. It’s all about the money and comparing notes.

AThinkingFool · November 7, 2020, 3:52am

It’s all about the $, not about who is right or wrong.

In investing, there seems to be an element of hindsight or confirmation bias. I am guilty of it myself, at times. However, I don’t believe that just because a stock price is ‘x’ amount higher today in one company than another, that means in itself the decision to sell or hold is a correct one. Equally, if you sell out of a stock and it then appreciates by x100% or x300%, faster than the company you replace it with, this doesn’t necessarily mean your decision to sell was wrong. After all, you could make the same decision in two stocks, one could go well and one badly, so is your decision right or wrong?

What seems more important to me than the stock price movement itself is the thought process behind your decisions, which over time should mean you are proved ‘right’ more often than wrong. Personally I had determined to wait until the Q3 earnings call to decide whether or not to sell Fastly, and then I sold out ahead of the call in the end when I got new information that Fastly had lost most or all of TikTok and I lost confidence in the prospect of management raising guidance. This isn’t something I had factored in.

So was I wrong not to sell out of Fastly immediately? In hindsight, yes.
Was I right to sell out ahead of the call, better late than never? In hindsight, yes.
But let’s imagine that this time next week the TikTok drama is suddenly resolved and Fastly’s stock price rebounds to $130 a week later. Would I have been wrong to sell? In hindsight, yes.

And I’m sure we’d get an influx of posts telling us so.

You can see whether I am right or wrong is defined by changing hindsight in this scenario. It is less about ‘right or wrong’, and more about varying degrees of right.

Let’s not forget, at the day of Fastly’s lowered guidance the YTD returns of both companies were:
Fastly: +499%
Cloudfare: +261%

Would someone who had chosen Cloudfare ahead of Fastly up to that point have necessarily been wrong? You would have 91% higher returns holding Fastly. In hindsight, yes. But what if someone had appreciated the underlying business of Cloudfare more than Fastly? Indeed, many of the reasons that Cloudfare appears to be a more favourable investment to many of us today, were also true before Fastly’s lowered guidance and after Q2.

So while I think it’s important to learn the valuable lessons offered to us on this board, so that our decision making is the best that it can be in future, I agree that we should not belabour the point of Fastly vs Net and the decision to sell. We should instead encourage people to consider what/if any learning experience they have had from it.

My own personal learning from this experience, is perhaps redefining when ‘a story changes’. Perhaps simply missed guidance or feeling substantial uncertainty, or that the story is becoming far too complicated, is enough. This is one lesson Saul has taught. Everyone can make their own decisions based on the information if the story has changed for them, and whether it is right or wrong is also a personal reflection.

So I agree with the OP, let’s move on please

Texmex · November 7, 2020, 11:44am

Fastly already warned after Q2 about the potential of losing Tiktok. Many here posted how a 6% or 12% revenue loss is a non issue - that was clearly not correct. Losing a 12% customer is always a big deal. Does not mean that company cannot make a come back like Twilio did with Uber.

We have always known about Fastly’s slow enterprise growth. Nothing new there.

The only new info we got was that some of their customers did not increase their usage towards the end of the Q as expected.

Since then I have communicated with IR and received confirmation from the CFO that:

Most of the customers who did not increase usage have come back. Specifically he says “timing of events (sport schedules, flash sales, technical planning)” were delayed and are back in Q4.
Revenue-based churn has been less than 1%. They are not losing customers.
Usage based model is not under threat. Customers are not cutting use. They believe more usage aligns with customer success and more value. So, they are sharing in their customer success. 50% rev is usage-based.

These points give me some confidence. The usage based model can surprise us in a positive way too, like in Q2. So, as of now I am still keeping my 2.5% position (NET is 7.7%). If revenue grows 50% in Q4 watch out for a quick ramp up in the share price. It is too early to conclude that Fastly is done and NET has won. Now if we start seeing some big customers move away from Fastly that will be new info. But we don’t know that yet.

draj · November 7, 2020, 12:34pm

<i>So was I wrong not to sell out of Fastly immediately? In hindsight, yes.
Was I right to sell out ahead of the call, better late than never? In hindsight, yes.
But let’s imagine that this time next week the TikTok drama is suddenly resolved and Fastly’s stock price rebounds to $130 a week later. Would I have been wrong to sell? In hindsight, yes.</i>

Thinking fool

Taking a page from your thesis about "tells" which by the way I find very helpful in thinking about these issues I would disagree somewhat with your assertion.

Yes it was an error not to sell FSLY immediately because there was a clear 'Tell' In fact I think there may have been an earlier tell when the CEO prevaricated in regard to the cause of earnings slowdown, in an earlier public statement.

How ever no matter what happens with TikTok  the decision to have sold  FSLY  was the correct one because it was based on information at your disposal, whereas the future of Tik Tok is not known.  On the other hand if you believed that there was a (say) 85% probability a priori that the Tik Tok situation would be resolved in favor of FSLY then PERHAPS you made the wrong decision. But in the earnings call there were two additional factors that might be considered 'tells' As I recall there was very little large customer growth which is the principal target market for the sophisticated FSLY network. Secondly there were additional slowdowns in usage  reported without sufficient explanation. 

Along the same lines just an observation about NET . The proposition that the real opportunity for NET comes from future regulatory  needs and high level customer services as opposed to speed which you referenced in your post about NET was articulated by the CEO in at least one public statement that I came across a short  while ago. It made sense at the time but I did not fully digest the implications which were that NET was going to conquer its market and perform very well.

 Investing  certainly  has some similarity to poker but  the 'tell' is sometimes found in obscure sources. Clearly its a multidimensional game . Nonlinear and multivariable.

cheers

arnie

draj · November 7, 2020, 12:38pm

No. of Recommendations: 0
So was I wrong not to sell out of Fastly immediately? In hindsight, yes.
Was I right to sell out ahead of the call, better late than never? In hindsight, yes.
But let’s imagine that this time next week the TikTok drama is suddenly resolved and Fastly’s stock price rebounds to $130 a week later. Would I have been wrong to sell? In hindsight, yes.

Thinking fool

Taking a page from your thesis about “tells” which by the way I find very helpful in thinking about these issues I would disagree somewhat with your assertion.

Yes it was an error not to sell FSLY immediately because there was a clear ‘Tell’ In fact I think there may have been an earlier tell when the CEO prevaricated in regard to the cause of earnings slowdown, in an earlier public statement.

How ever no matter what happens with TikTok the decision to have sold FSLY was the correct one because it was based on information at your disposal, whereas the future of Tik Tok is not known. On the other hand if you believed that there was a (say) 85% probability a priori that the Tik Tok situation would be resolved in favor of FSLY then PERHAPS you made the wrong decision. But in the earnings call there were two additional factors that might be considered ‘tells’ As I recall there was very little large customer growth which is the principal target market for the sophisticated FSLY network. Secondly there were additional slowdowns in usage reported without sufficient explanation.

Along the same lines just an observation about NET . The proposition that the real opportunity for NET comes from future regulatory needs and high level customer services as opposed to speed which you referenced in your post about NET was articulated by the CEO in at least one public statement that I came across a short while ago. It made sense at the time but I did not fully digest the implications which were that NET was going to conquer its market and perform very well.

Investing certainly has some similarity to poker but the ‘tell’ is sometimes found in obscure sources. Clearly its a multidimensional game . Nonlinear and multivariable.

cheers

arnie

Pono · November 7, 2020, 3:32pm

I think a lot of the FSLY/NET comparisons are bit of apples and oranges. They aren’t “direct” competitors, and they share some clients. Earlier in the year, I thought they were, and I sold my NET position and bought FSLY. Until recently, that was a good move, but it really was a bit misinformed. I bought back into NET recently and doubled my position in NET yesterday. I sold short 80% of my FSLY position after the pre-earnings release (not early as I should have) and have since closed it. All my stocks are in a taxable account so taxes matter to me. I have not added to FSLY recently but that is because it is still my #1 holding.

Bottom line, I think both have excellent revenue growth, good (FSLY) and very good (NET) gross margins, excellent technology, good (NET) and very good (FSLY) DBNER and a big TAM.

I looked a bit more closely to solidify my conviction and here are some thoughts.

Revenues & Gross Margin:
FSLY Q3 $70.64mm +41.85% YOY
FSLY Q2 $74.63mm +61.70% YOY
FSLY Q1 $62.92mm +38.15% YOY
FSLY Q4 $58.93mm +44.46% YOY

FSLY Avg. Rev Growth: 46.54%
FSLY Avg. GM: 58.02%

NET Q3 $114.6mm +54.39% YOY
NET Q2 $99.72mm +44.94% YOY
NET Q1 $91.25mm +47.83% YOY
NET Q4 $83.90mm +51.23% YOY

NET Avg. Rev Growth: 49.60%
NET Avg. GM: 76.90%

Enterprise Customers*:
FSLY Q3: 313 +3.0% QtQ
FSLY Q2: 304 +2.4% QtQ
FSLY Q1: 297 +3.2% QtQ
FSLY Q4: 288 ?
*FSLY defines Ent Cust as >$100,000 of revenue for the TTM. So, this is clearly a lagging indicator. Landing a new customer in Q3 generating $99k of revenues would not be an enterprise customer.

NET Q3: 736 +63.2% QtQ Paying: 100,968 +24.7% QtQ
NET Q2: 451 +72.8% QtQ Paying: 80,986 +19.7% QtQ
NET Q1: 261 ? Paying: 67,643 ?
NET Q4: ?
*NET defines Ent Cust as >$100,000 of annualized revenue. So, my take is they have 736 costumers generating $25k+ of revenue. Note, NET had 100,968 paying customers in Q3, and 3.2 million total free (including me on the 1.1.1.1 - Warp App) and paying customers.

Quick Takes:
Given that revenue growth of both FSLY and NET are similar, one can only conclude that FSLY is expanding its revenues with existing customers with a need/desire for its unique platform. NET, on the other hand, is growing by expanding into new enterprises more broadly, but the revenue spend per enterprise is not as great as FSLY’s customers.

FSLY reports that 88% of its revenue is from Ent customers. That means the avg. spend of Ent Customers in Q3 was an average spend of $198,590/qtr and annualized spend estimate of ~$795,395/yr. NET doesn’t report its revenue for Ent customers, but it’s likely a lot less. At a bare minimum, they are getting $18.4mm from Ent in Q3 (736 * $25k/qtr) or 16% of Qtr revenues. At FSLY 88% revenues levels from Ent customers, NET would be getting $100.46mm from Ent or $136,497/qtr per Ent customer - only 68% of FSLY’s per Ent customer revenues. If we assume NET’s Ent customers give them 50% of their revenues, then NET’s Ent customer spend would be around $77,555/qtr or $310,220/year.

In any case, I think the Enterprise adds are not really comparable. The business models are different. Undeniably, NET’s Ent Cust growth is impressive, and I like that model better. It is broader and less dependent on fewer bigger customers. FSLY’s revenue is highly dependent on fewer customers. This creates far more volatility as we saw recently with the loss of their largest customer. On the other hand, I’m not sure it makes FSLY’s model bad.

I’d also note that FSLY can only sell so much in a QTR without augmenting existing POPs or building new ones. They increase this every qtr. If their existing customers are grabbing all of the available space - and paying for it - how can FSLY add new customers. I guess one would say build more capacity faster. If their new secure@edge and edge@compute products are going to drive more sales, I think that they need to be more aggressive with their CapEx and adding new customers.

Product:
To summarize what others have said, NET has an integrated and enhanced CDN platform (like AKMI) that provides zero trust security and optics (like ZS) and edge computing. It seems like a simple integrated approach. FSLY provides a the fastest enhanced CDN platform (including video streaming) that can provide private space for an Ent customer on FSLY platform (unlike NET). FSLY just added a security aspect and are rolling out Edge computing. FSLY is more developer friendly and personalized, but also likely harder to onboard than NET.

Final Thoughts:
I think there is room for both FSLY and NET. If you are going head to head and could only choose one to invest in now, then ignoring valuations I think you pick NET. I added NET and doubled my position here. It really is a strong company. Yet, I’m comfortable holding my FSLY here as well.

Going forward, it does look like FSLY will compete more with NET in the future especially with the large Enterprise Customers with a more integrated approach of CDN, security and edge, but I don’t know if that head to head will be as much as it might seem. I think there is room for both.

In the recent past, Tik Tok had a huge impact positively and negatively on FSLY’s numbers and stock price. While I think it was an anomaly, it does highlight that FSLY will be more erratic with its QtQ numbers and stock price. For example, they could come back in Q4 and have a large positive jolt.

Finally, leadership is a big factor, and my take at this point is NET has the edge here. From a public investor standpoint, Prince is more confident and polished than Bixby. Prince reminds me of Jensen Huang of Nvidia.

Mike

Long FSLY and NET. Note, I’m far more diversified than most here and sell much less often as well.

epnh · November 7, 2020, 5:52pm

I sold short 80% of my FSLY position … I have not added to
FSLY recently but that is because it is still my #1 holding.

Good evening, Mike.

I won’t have time to read through your post until later tonight, but wanted to ask a question just out of curiosity… why short FSLY rather than sell some of what you have? You’ll cover your short eventually if you haven’t already, but you could just as easily buy it back at the point where you’d normally buy to cover.

I realize the effect is about the same but just wondering if there is some aspect of shorting a stock you own, that I don’t see, that is beneficial over just selling some of your shares.

Eric [still learning about this stuff…]

Pono · November 7, 2020, 7:19pm

I realize the effect is about the same but just wondering if there is some aspect of shorting a stock you own, that I don’t see, that is beneficial over just selling some of your shares.

This response is OT for this board. Any further questions should be raised on tax strategies or other on topic boards (i.e. shorting/options strategies etc).

Answer: Taxes

My preference was to hold long term. Yet, there was a lot of uncertainty caused by the pre-release, and I wanted to protect myself from further sell-off.

If I sold, I would recognized substantial short term gains taxed at 40%+ in 2020. I sold a “covered” short instead. FSLY did drop, so I realized short term gains when I closed my short position on 10/28. However, my FSLY position has never changed and I avoided substantial short term gains. FSLY has since rebounded some.

Shorting against the box used to be common. In 1997, IRC Sec. 1259 was enacted and limits its use, and you must recognize a constructive sale on your long position unless you qualify for the exception. To qualify, you must (a) close your covered short position before Jan 30 (i.e., before 30 days after the close of your tax year), and (b) continue to hold your long position “unprotected” for at least 60 days after you close your short. If I sell before 12/28, I will have a deemed sale when I shorted.

If I hold past 12/28, I will have a long term holding period and, if I don’t sell this year, will defer paying any taxes on the gain for at least a year. Of course, I pay taxes on the short term gain from the short.

Why only 80%, and why not options? Again, OT, but I’m subject to certain trading restrictions and requirements by my employer. (Please don’t respond to this post here with other strategies which are OT for this board).

Mike

AThinkingFool · November 8, 2020, 5:18am

Taking a page from your thesis about “tells” which by the way I find very helpful in thinking about these issues I would disagree somewhat with your assertion.

Hi Draj,

We are actually in agreement (and I like your interpretation of the ‘tells’). Your current allocation can only reflect what you think is going to happen based on the information and the ‘tells’ available, but with ‘hindsight’ whether you are right or wrong is defined after the fact. It is the outcome that will ultimately define whether your decision is ‘right or wrong’, with this concept. My point is more about hindsight bias.

I had replied to this effect in an email off board, but expanding here (edited). I guess this falls under ‘investing philosophy’:

Right or wrong

What it comes down to, is how do you measure ‘right or wrong’? Is it simply returns?

That would feel too simplistic, because you are placing importance in the result rather than the decision making process itself, which could be flawed. You could be right for the wrong reasons, and vice versa.

Let’s take an example. You own two companies, ‘A’ and ‘B’, which are both founder led. This is an important part of your thesis, because you believe the founders are integral for the growth of both companies in its early stages. However, the founders of both companies have a falling out with their board and they leave, replaced with new corporate CEOs. The story has fundamentally changed for you, and you sell out of both companies.

The new CEO of company ‘A’ does not fit in, the company’s growth stalls, and it is acquired. Meanwhile the stock price has languished.
The new CEO of company ‘B’ however is a hit, the company’s growth accelerates, and the stock price explodes.

Assuming all other variables being equal in this scenario, you have taken the same decision in two instances, but were you right or wrong? If you are judging by returns, then your same decision was both right and wrong. This is hindsight bias in action.

Of course, you can take a ‘wait and see’ approach and sell out and then get back in if the ‘story changes’ back. But in the instance of company ‘B’, you have already missed out on 100% returns since you sold.

Conclusion

There are simply too many variables to be ‘right’ 100% of the time, and too many unknowns. Like you said, you just have to make the most of the information available to you today to make your decisions, and maybe only hindsight will prove you right or wrong. But we should be cognisant of that. Your underlying decision could be right more often than not, and it is the ‘more often than not’ which is important.

Correlation is not always causation, and what drives returns are decisions. So making the ‘right’ decisions over the long-run will give you better returns, but not always. And this is why, for example, Saul has been such a successful investor over so long. He is ‘right’ more often than not.

draj · November 8, 2020, 9:49am

Hi AT,

I can’t fault your argument given the definition that you have chosen to use. One further conclusion if I may. You are better off making money having made the ‘wrong’ decision than making the ‘right’ decision and losing out on future gains.(Using my proposed definitions)

On the other hand if I comprehend Saul’s Knowledge Base philosophy correctly one must make a decision based on ones evaluation of the best available info. Hindsight is irrelevant because one looks forward not backward.

IMHO Saul is successful because his evaluation of available info is typically quicker and better than most other folks.

sunnym · November 8, 2020, 2:43pm

I can’t fault your argument given the definition that you have chosen to use. One further conclusion if I may. You are better off making money having made the ‘wrong’ decision than making the ‘right’ decision and losing out on future gains.(Using my proposed definitions)

You might make money 2 out of 10 times you made the ‘wrong’ decision and lose it 8 out of 10. I believe AT is making the point of having a good process and not relying on the outcome as the way to tell you whether your process is good or not. This is what Saul actually does himself. He has a process and he sticks to it. He doesn’t care if the stock goes up 100% after he sells it. He cares what happens with his holdings.

CrazyCzech · November 8, 2020, 8:17pm

Hi,

this is so well said. Investing is a very emotional affair, learning how to manage these emotions in light of facts and circumstances is key. Thank you!

My own personal learning from this experience, is perhaps redefining when ‘a story changes’. Perhaps simply missed guidance or feeling substantial uncertainty, or that the story is becoming far too complicated, is enough. This is one lesson Saul has taught. Everyone can make their own decisions based on the information if the story has changed for them, and whether it is right or wrong is also a personal reflection.