Fastly - Bull v. Bear

Investment Analysis Clubs Saul’s Investing Discussions
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FWIW…

I have been debating the merits of my FSLY investment case on another board for the past few days:

  • “Flash in the Pan” vs. “Plenty of Runway Left”.
  • “Just a WFH Darling” vs. “A Disruptive Stock for the Long Term”
  • “FSLY is Not Edge Compute” vs. “Riding the Edge Compute Wave”

Most recently the bear side of my bull side debate came back to me with the following:

“Harley. I think it depends on one’s goals, which is why I find our research so useful. We really understand this industry on a product level. So, long-term, we tend to get who will succeed and who will fail. On FSLY, I know we are very adamant this is not a stock that will add any significant value to future tech trends, even though there is a ton of hype to the contrary. They seem to have rebranded themselves on antiquated technology, which coupled with their service benefiting from stay-at-home culture, seems to be a winner. As a tech “investor,” which I know can get lost in the numerous attempts we take to get entries, this is not a company we want to park money in long-term. However, as a momentum trader, this stock is a rare gem. We’ll likely do some swing trading on it, but I can’t see it sitting next to NVDA, ROKU, ZM, as positions we look to retire on.”

I think it always helps to step out of the echo chamber of confirmation bias when thinking about investments and listen to dissenting opinions. I think it is important to open up the debate in an effort to avoid Group Think.

I will give this some thought and perhaps we toss this around a bit.

Harley

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We really understand this industry on a product level…They seem to have rebranded themselves on antiquated technology…

You can stop listening to them now.

Fastly has the most up to date technology of any CDN, and their upcoming Edge Compute solution has reported startup performance that is orders of magnitude better than anyone else right now. They are best of breed in what they do.

Example: One of the most performance-centric internet businesses around is gaming. One of the premier online gaming companies, Riot Games (maker of League of Legends), learned from Fastly how to set up their own high-speed internet backbone. Most everyone else in the CDN world is using distributed POP technology that is essentially two decades old.

I don’t know if Fastly is a great investment or not, but there really is no arguing that Fastly’s technology is among the best in the industry, if not the absolute best.

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I have been debating the merits of my FSLY investment case on another board for the past few days

Any chance you could link us to that board? Is it on Fool? I would like to read those arguments for myself.

Thanks

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Harley,

the reason why fastly’s technology is better , at least to my rather limited ability to understanding of the underlying architecture is brilliantly summed up in the article on softwarestackinvesting.

Having said that I am probably going to sell around half my remaining fastly position today. This will take it down to about 20% of my original size. I bought all of it at 22 and change and sold some at 88 , some at 89 and some yesterday at 100.70.

I fully expect them to have great results on 5th August but frankly fail to see how they will get close to justifying this quadrupling in price this quarter. Any major fall, and by that I mean from today’s opening which looks like it will be around 99 , to say high sixties will mean that I will add.

I will keep the 20% just in case they really blow out expectations and that I am wrong ( happens often at least according to all my ex wives and girlfriends !!!).

As probably one of the older members of this board, I look around at things to invest in and find little for me at the moment with the possible exception of adding to Elastic.

This is now my best year (ytd 60.1%) since 2009 when I made 99.6% but I always have in the back of my mind 2015 when the half year return of 31+% turned into a full year of 3.5ish%

biggest holdings

ADI owned since 1986 20%
AYX 13%
FSLY 12%
MELI 10% having bought at 86 and around 140 and sold too much at various points from 200 to 600.
Cash 20%

Take care.

Jonathan

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We really understand this industry on a product level…They seem to have rebranded themselves on antiquated technology…

You can stop listening to them now.

Fastly has the most up to date technology of any CDN, and their upcoming Edge Compute solution has reported startup performance that is orders of magnitude better than anyone else right now. They are best of breed in what they do.

Hi Harley,

smorg and I sometimes disagree but I certainly agree with him on this. According to everything that I have learned Fastly has technology that is way ahead of anyone else’s, and the questions have been:

  • whether others will catch up at some time in the future and commoditize it, or
  • how many customers will be high tech enough to use it (most of their current customers seem to be large super-high-tech first adopters).

Whoever wrote “They seem to have rebranded themselves on antiquated technology” never bothered to learn about the company. (I can understand that. There are lots of companies out there and you can’t learn about them all, but what that person wrote is embarrassingly wrong.)

Best,

Saul

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Beth Kindig covered FSLY and a few other board favorites and it was posted a while back here:
https://discussion.fool.com/beth-kindig-on-zm-ddog-fsly-34542764…

Here is the direct link to the video:
https://seekingalpha.com/article/4355130-cloud-and-zoom-shif…

People should watch the video and judge for themselves after hearing her thoughts on FSLY. I sold FSLY after watching it. I’ve been in tech my entire career and my take is the CDN category has always been a low margin area and has a limited TAM. No matter how good the tech is you can’t increase the TAM. Yes, FSLY gets a bump from the pandemic and that may go on for a while. Long term it’s a tough road. I also believe that this is an area that the big cloud player like AWS won’t allow a third party to dominate – if FSLY tech is that good. Which remains to be seen.

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is brilliantly summed up in the article on softwarestackinvesting.

Sorry , should have provided the link to this.

https://softwarestackinvesting.com/fastly-edge-compute-expla…

Jonathan

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Having said that I am probably going to sell around half my remaining fastly position today. This will take it down to about 20% of my original size. I bought all of it at 22 and change and sold some at 88 , some at 89 and some yesterday at 100.70.

In simple terms (maybe simplistic) the chief advantage to FSLY is that they have created a system which allows them to place the 'edge" anywhere that it does the most good for the specific use case and specific client. Furthermore their response times are calibrated in microseconds. This distinguishes them from all the competition.

That being said SSA, as well as Bert, Beth Kindig and others have cautioned that their approach is still not fully proven despite enthusiastic beta client response. They advise caution in the face of the run up. So my conviction is a bit shaken and I have therefore reduced my FSLY holdings by 40%. I still have about a 6% stake.

We shall see.

Cheers
draj

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@saul

“There are lots of companies out there and you can’t learn about them all, but what that person wrote is embarrassingly wrong.”

I could not agree with you more! I remain long on FSLY and have continued to add, with the exception of the past several days where there has been a bit, in my opinion, of irrational exuberance that has given me pause.

I think that this is a developer friendly platform which historically has resulted in strong tailwinds and increased “stickyness”. I will consider adding on strong pullbacks, but until then, I await the next earnings report.

As Bear stated at one pont:

“I think we do know it will stay above 50% and probably 60%, because it is usage based. I don’t know that it will keep accelerating, but usage seems unlikely to come down. That’s why they’ve already raise guidance for the full year to 290m. That’s 44% guidance…they’ll definitely do 50% and probably 60%.”

I think it makes a lot of sense for me to hold, take a deep breath and await the outcome at 5:00pm EST, Wednesday, August 5th.

https://investors.fastly.com/news/news-details/2020/Fastly-t…

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SSA, as well as Bert, Beth Kindig and others have cautioned that their approach is still not fully proven despite enthusiastic beta client response. They advise caution in the face of the run up.

Hi Draj,

While giving appropriate cautions, the Software Stack Investing guy, poffringa, has indicated multiple times that FSLY is his largest position. The latest was in his report on Fastly a week ago when he said:

Personally, I have a large portion of my portfolio allocated to FSLY… I plan to maintain an oversized portion of my portfolio allocated to FSLY, with some periodic trimming to maintain parity with other holdings.

He linked to his portfolio where he listed his positions. Fastly was 24% of his portfolio while his next largest were 17%, 16%, and 12%. Based on that, I’d say that in spite of his cautions, Fastly is by far his highest conviction position.

Best,

Saul

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Great article. The ideas on secure sandboxing appear like a whole new way of approaching security. There is a video link about it at the end of the article.

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People should watch the video and judge for themselves after hearing her thoughts on FSLY. I sold FSLY after watching it.

I watched the video and was not impressed, it sounded like someone who does not really understand what they are talking about.

I’ve been in tech my entire career and my take is the CDN category has always been a low margin area and has a limited TAM. No matter how good the tech is you can’t increase the TAM. Yes, FSLY gets a bump from the pandemic and that may go on for a while. Long term it’s a tough road. I also believe that this is an area that the big cloud player like AWS won’t allow a third party to dominate – if FSLY tech is that good. Which remains to be seen.

We don’t need third party opinions because we can and do experience the technology every time we download a CDN delivered web page. Non professionals might not know what they are seeing but web developers quickly figure out that the CDNs are not performing well enough. This was not visible or apparent to me before the pandemic but with the increased internet traffic generated by video conferencing it is clearly visible. I’m sorry to say that TMF’s CDN provider is pretty crappy which is why we get so many misses.

This has enormous consequences for investors (if my diagnosis is correct). Fastly created a new CDN architecture that is supposedly more efficient than legacy CDNs. If that is the case and high volume internet traffic is here to stay, then there will be a lot of demand for Fastly at the expense of other CDN providers. Sooner or later they will catch on but will be beset by the “Innovator’s Dilemma.” They would have to reconfigure their networks, hardware and software, an expensive proposition that incumbents don’t like to do. But even if they do it, Fastly has a one or two year window of opportunity.

The above is only addressing the CDN part of their business. IoT needs Edge Computing which only adds to the internet traffic volume. Just what “edge” means is not set in stone. Having been in IT since 1960 I can attest that as technologies evolved (computer and communications) there has been a seesaw from core to edge and back. The current shift is from core to edge. Anything that an IoT device does on it’s own is not, in my estimation as an investor, edge but “local.” “Edge” is the internet node closest to “local.”

This battle reminds me of Apple taking over smartphones from Nokia and Blackberry. Same service, much improved user interface. Will the Nokias and Blackberrys of CDN suffer the same fate?

I have the feeling that the debate over Fastly is ignoring the IoT/Edge bull part of the story. One Fool commented that he sees no new opportunities because all the value has already been discounted by high valuations, a reference, I believe to be to the year 2000. Is 2020 a replay of 2000? I don’t think so, it’s not in the charts

S&P 500 40 year chart: https://invest.kleinnet.com/bmw1/stats40/^GSPC.html

Saul’s 200+% YTD gain is even steeper that the 1995-2000 run but it is only in a very narrow slice of the market, about a dozen or so stocks. Any of them could easily give back 50% on a bad report, a bear raid, or profit taking (which Saul confessed to ;). No growth stock is immune to that eventuality. The question is how to deal with it. My solution is to have a year’s worth spending money in cash and about 1/3 of my securities in covered call income. This way I can let the other 2/3 ride the crazy Wall Street Rollercoaster.

This morning I read some interesting news, interesting not for the human interest side but for the investing implications

The coronavirus pandemic is expanding California’s digital divide
Kevin Frazier
TechCrunch - July 9, 2020

If every California student without an adequate internet connection got together and formed a state, it would contain more residents than Idaho or Hawaii.

A total of 1,529,000 K-12 students in California don’t have the connectivity required for adequate distance learning.

Analysis from Common Sense Media also revealed that students lacking adequate connection commonly lack an adequate device as well. The homework gap that separates those with strong connections from those on the wrong side of the digital divide will become a homework chasm without drastic and immediate intervention.

https://finance.yahoo.com/news/coronavirus-pandemic-expandin…

It’s not just business and social gatherings but the very huge education sector that is driving Internet traffic volume that the current infrastructure is having a hard time coping with. This is a huge boost for providers like Zoom and Fastly that have the better technology in place now.

Denny Schlesinger

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I have been reading the Fastly threads, the SoftwareStackInvesting article and Beth Kindig’s interview. We have two overlapping issues that both determine Fastly’s future. One is their superiority as a CDN provider. The other is CDN as a technology versus more advanced edge computing. This post started as notes to myself. If it helps someone else, great. If you already know all this, sorry for the interrupt.

The SoftwareStackInvesting article
https://softwarestackinvesting.com/fastly-edge-compute-expla…

describes Fastly’s technical advantages as a content delivery network (CDN). A CDN is a way to park content close to the consumer, such that it minimizes the time after the consumer clicks on something that the something arrives on their screen. It stores copies of frequently requested content close to the consumer and provides fast pipes for the rest of the content to come from the “origin” server. So as a CDN, they are out ahead.

The article goes on to say that Fastly is building a truer edge computing platform that allows some of the “origin server” computation and decision-making to happen on Fastly equipment (closer to the consumer), rather than at the origin server. They aren’t just storing content, they are storing software that makes decisions about the request and the response. Decisions made there will optimize the actual request made to the origin server(s) and how the content gets back to the consumer.

I am inventing an example: Your kid wants to watch Donald Duck. An edge computing platform receives your home’s Disney login and launches Disney software to parse the request.
“Subscriber ID? Check. Password? Check. Request? Donald Duck.
Decision: Cartoons are stored in Burbank Disney servers. Send the request there and establish a connection to the subscriber for the video stream.”

Later, when the kid is asleep, you want to watch the Cubs win the 2016 World Series again. Your request is parsed and sent to the ESPN portion of Disney in another location.

This isn’t just caching Disney content closer to the consumer like CDN’s do. This is also caching Disney software that decides what happens with the request for content. It bypasses some of the back-and-forth between customer and multiple origin servers that might otherwise have to talk to each other before your request can be filled. The cached software makes decisions about your request, then routes content to you based on the decisions.

Ms. Kindig’s discussion of Fastly starts around the 27 minute mark:
https://seekingalpha.com/article/4355130-cloud-and-zoom-shif…

She assumes that the listener understands the difference between CDN’s and “edge computing”. Hopefully I just explained that. Kindig says that Fastly is primarily a CDN. CDN’s are a low margin business. They got a boost from the increased streaming demand after the pandemic hit like Zoom did. She questions if CDN’s will still do well when the pandemic and streaming demands recede. That implies a risk to Fastly because they are primarily in the CDN business.

Kindig mentions Fastly’s newer “edge computing” platform that is also discussed in the SoftwareStackInvesting article. Says it is in beta testing and she would like to hear from someone who the beta customers are. She thinks Equanix, Amazon Web Services and Microsoft Azure will dominate edge computing and not leave much for anyone else.

I am not offering an opinion on Fastly’s future. What I did here was organize my notes of what I read and heard in a way that was helpful to me, and hopefully to others.

Thanks and regards to all.

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And aside on this discussion…Can you comment on FSTLY vs NET? Fastly does look to provide higher end products (not sure how it can be characterized as antiquated) vs Cloudfare’s more ‘popular’ offerings. Is that only down to 2 different sectors and market?

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He linked to his portfolio where he listed his positions. Fastly was 24% of his portfolio while his next largest were 17%, 16%, and 12%. Based on that, I’d say that in spite of his cautions, Fastly is by far his highest conviction position.

Best,

Clearly.

When I read the article and last checked the link his portfolio showed FSLY as his largest position but only at 10%. That would have been on July 2 evidently a lifetime ago.

Cheers

draj

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I watched the video and was not impressed, it sounded like someone who does not really understand what they are talking about.

Yeah, as I said a couple weeks ago: https://discussion.fool.com/that-was-a-really-frustrating-listen…

I have the feeling that the debate over Fastly is ignoring the IoT/Edge bull part of the story.

It does seem that the bears are either ignorant of or are discounting Fastly’s upcoming Compute@Edge product, which is in beta now, with at least Shopify’s beta use case being promoted recently.

OTOH, there are at least a few bulls that read Compute@Edge’s 35 micro-second process start-up and equate that to their CDN technology. FWIW, Fastly maintains a live network maps with real-time performance stats: https://www.fastly.com/network-map What I’ve seen are over 15M requests per second, cache hit ratios near 90%, and “hit times” (time to server a piece of content under 1/8 of a milli-second (that’s 1/8th of 1/1000th of a second, or under 125 micro-seconds).

If I’m trying to find real bear cases for Fastly, I could make these points:

  1. Best technology doesn’t always win in the market. VHS beat Beta, Windows beat MacOS, etc.
  2. No CDN is going to win everything. Companies with content want multiple CDNs to protect them from any individual CDN going down and taking everything they have down. This happened with Cloudflare last year and it wasn’t pretty.
  3. Fastly’s CDN is not the best at everything and not everywhere. As seen in Fastly’s network map, Fastly doesn’t have close servers for every country in the world. It’s security features, while they work well, do not offer the most functionality.
  4. Compute@Edge is in Beta and no-one knows how popular it will be. It won’t be generally available until 2021, so no revenue from it until then. Even if popular, you can bet Microsoft and Amazon won’t stand still - Fastly is playing in big boy territory here.
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On Fastly vs CDN debate, to me its focused on developer community - allowing developers to write custom code, integrate that with Fastly infrastructure - was a big big tie breaker.

On this board, we have seen few astounding winners with this strategy… TWLO is on top of the list…

If you read Peter Offringa’s article on Fastly, he clarifies why developers prefer Fastly which not only allows them to customize, but do so very easily and delivers much better performance due to its ultra-fast server start technology
(I am not a techie… so may be paraphrasing something here based on what I understood)…

Shopify and other use cases articulated by Fastly and explained by Peter clearly says that this is not vanilla CDN… it is already, true edge service platform with high degree of programmability…

those (including Beth) saying this is old CDN haven’t take time to understand FSLY (btw, I was in the same boat two months back, so I do relate to the thought process)…

And FSLY management clearly identified that they are premier pricing, they don’t really get the volume based, price sensitive CDN business and their expectations are for gross margins to further improve all the way into 70% range… which is clearly not a CDN play…

Can others catch up and beat FSLY, yes, but it can take a long time and even then, with all the custom code written on FSLY infrastructure, their existing client work loads likely sustained… cost of switching increases with time… that is not vanilla CDN…

I see FSLY as super leveraged play on e-commerce, WFH, online gaming, 5G and digital transformation… If there is a pure play company that benefits from each one of these, it is FSLY… I wouldn’t want to get scared out of CDN comparison at this stage…

nilvest

PS: I have ~4% position in FSLY… and looking to build larger position, though it is hard for me to take money out of my larger positions like LVGO, CRWD and DDOG to put into FSLY!!

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“I’ve been in tech my entire career and my take is the CDN category has always been a low margin area and has a limited TAM. No matter how good the tech is you can’t increase the TAM.”

You have me on technological competence, but my edge is that i know that this last phrase is not correct.

I have spent the last 31 years of my life studying leadership. What I know is that companies grow or shrink to the size of their leadership, almost regardless of products and markets. If a leader of a $1 billion company has the vision breadth, depth, executive skill and passion to lead a $100 billion, he will find where the TAM is and bring his company along.

Consider an online bookstore company in the late 1990s with thousands of upstart competitors doing online sales. Some asked, how big can Amazon become by selling books? A few knew he might eventually sell other online retail products. No one saw that Jeff Bezos could expand that company into AWS, kindle, prime, and much more, and become a multi trillion dollar company.

It’s not sufficient to have a wonderful idea or a wonderful product. Google, Microsoft, Amazon, Walmart, Schwab, Netflix, etc would have achieved little without genius at its helm.

This is not the place for a detailed discussion on this subject but i’ll leave with a quote and a link. Someone here mentioned they hold ADI stock. Vincent Roche, the capable CEO of that company a few years ago said, “History is littered with the corpses of brilliant ideas that never found… (its way to market).” This discussion is at 3:30 in the link below

https://www.youtube.com/watch?v=81y3E45YcEs

I haven’t looked closely enough at the new FSLY CEO, but if he has the ability and passion to run a company 10X its current size and complexity, the TAM is out there somewhere.

Among our Saul stocks, my favorites almost since they became public, and led by visionaries and executive leaders big enough to run bigger companies, to include AYX, LVGO, WIX, ROKU, RDFN, SE, SQ, PYPL, PEGA, SNAP, ADBE, CRM. I rely on Bert, Saul, and a few of the brilliant technology people here for understanding of products and potential competition and select companies with the strongest leadership.

Sometimes i’m wrong about the stocks. Sometimes i’m wrong about the leadership, usually not about about their genius, but once in a while about their lack of shareholder friendly fiduciary values, executive acumen, or emotional stability. I look at it as closely as i can. Sometimes i get it wrong and sell as soon as i become aware. Of course there are other factors that can affect a stock such as geopolitical issues. Not all leaders with the requisite potential succeed. But no company without the requisite potential at the top, can grow beyond leadership vision/talent.

JMHO

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Draj,

If you scroll down to the bottom of the following SSI web page, you will find FSLY is Peter’s largest position to date at 24%.

https://softwarestackinvesting.com/software-stock-recommenda…

Zoro

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I have spent the last 31 years of my life studying leadership. What I know is that companies grow or shrink to the size of their leadership, almost regardless of products and markets. If a leader of a $1 billion company has the vision breadth, depth, executive skill and passion to lead a $100 billion, he will find where the TAM is and bring his company along.

Years ago, one of my courses at Harvard Business School focused on venture capitalists and the criteria they used to evaluate startups. After studying case after case, it became apparent that one of the most important factors in gaining access to venture capital was the quality of the management team. The VC’s looked for strong leadership and a seasoned, compatible management team. The company’s Big Product Idea seemed to carry some weight, but it ranked fourth or fifth among the VC’s evaluation criteria.

As a technical person with a freshly minted PhD in Physics, that made no sense to me. I thought that surely the Big Product Idea was the key to success, and brilliant technical people like me were the superstars that made it all happen!

One day after class I approached the professor to try to make sense of it all. He basically explained that when it came to high-tech startups, one good idea does not guarantee success. Even if it’s a great idea, a strong company needs to have a continuous pipeline of great ideas, not just one. He also pointed out that there are plenty of brilliant technical people available, but relatively few brilliant leaders. That’s why a great CEO will eventually grow and move on from one successful venture to another. The VC’s know who they are and they track them carefully. It’s fairly common for a venture firm to recognize a potentially great company that lacks key leadership, and match that company with the right individual(s) to create a solid management team. In fact, that matchmaking may be the most important role that a venture capital firm provides, even more important than providing seed capital.

As a scientist, I can’t help but perform a deep dive assessment of the underlying technology when evaluating a company to invest in. But I’ve learned that the company’s success is ultimately far more dependent on the vision and execution of the management team. That’s why I shake my head at some of the postings on the Fool boards when we endlessly try to evaluate every nuance of a company’s technology and make endless comparisons of the most miniscule technical features to their competitors. Unless you’re a technologist who works directly for the company or their competitor, you will never know enough to make the kind of technology assessments that I see on these boards.

However, you can do something much more important. You can watch videos of the management team, listen carefully to their earnings calls, and gauge the team’s passion, vision, clarity, honesty, and overall leadership. That will tell you a great deal about their chances for future success. That’s what the venture capitalists do, and you can learn the same critical evaluation skills.

Now go back and read addedupon’s post #69370 six more times :slight_smile:

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