First of all, I want to say thanks to everybody for their insights into Fastly in the last day or so. I find it very educational. I’ve only been actively investing since the beginning of the pandemic really, so these past couple of days feels like a real learning experience. And since I found this board this summer, I have made some nice returns, and that is largely thanks to Saul and the other contributors. So when Saul, Bear, Stocknovice and others, experienced investors who have been doing this at the top of their game for many years, all weigh in with their views and let us know that they have sold or trimmed Fastly, you pay attention. It would seem silly not to.
But while simply copying what they do would almost guarantee excellent returns and a less stressful life, that’s not how I want to invest, and it doesn’t seem conducive to learning. I like to think critically, so I try to take the information they’re offering and the lessons I’ve so far learned and apply them to my own decision making. I want to understand the rationale behind my investments, and to build my own conviction.
Conviction
When I first looked into Fastly, quite honestly, I did not see what the fuss was about. When I read their Q2 report, my first reaction was to think ‘where is all this hype coming from’ and that I should have done more due diligence before entering my small position then. It was immediately apparent to me that its Enterprise customers were decelerating sequentially and its usage had spiked, but that was forecast to be flat going forwards. Therefore where was its growth going to continue to come from? (https://discussion.fool.com/what-really-jumps-out-at-me-reading-…).
But then the more I read, the more I found answers to each of these concerns and I developed a thesis, and in between Q2 and Q3, my conviction for Fastly only grew, considerably. I doubled my allocation around $70-80, and when it reached $130 it represented 20% of my portfolio.
And so what I have struggled to come to terms with since Fastly’s pre-earnings guidance, is what is the new information that is driving this overall negative sentiment (at least on this board)? I understand completely why the stock price fell 30%, as a beat was almost certainly priced in. But what has changed from that guidance alone that someone would be invested in Fastly last week, but not this week.
New Information and the Story
When faced with the question should I sell a stock, I have learned a couple of lessons from this board:
- Don’t sell just because the stock price rises
- Sell when new information presents itself or the story changes
I understand most of the points made on the board about Fastly’s guidance, and I agree with most of them, and respect the decisions everyone has taken for good reasons.
But for me, what I keep coming back to, is how much of it is new? We already knew that Fastly’s revenue would not accelerate sequentially, this is what they had guided for, and we knew that TikTok was a risk factor. And what does this miss mean? The optics for missing guidance is not great, and does not speak volumes for management. But we are talking about a $4m miss. My thesis to invest in Fastly was not based on $4m of revenue either way, or on the notion that management was sandbagging guidance, but with a more long term perspective.
What is the new information between Q2 and Q3? And has the story changed?
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The acquisition of Signal Sciences. Accretive to revenue, with higher growth, higher margins, 42 new Enterprise customers, a company with similar DNA, synergies and cross-sell opportunity, a more rounded proposition to go after new customers with, and Secure@Edge to integrate with Compute@Edge, this seemed like a great deal all round. Let’s not forget, this should reaccelerate Fastly’s revenue, organically or not. SSI’s deep-dive: (https://softwarestackinvesting.com/fastly-and-signal-science…)
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Partnership with Google Cloud. Making Fastly available on Google Cloud Marketplace means that customers can quickly purchase Fastly’s solution from Google Cloud and get a unified billing experience. This unique partnership allows developers to build, test, and deploy applications in a scalable, reliable cloud environment (https://investors.fastly.com/news/news-details/2020/Fastly-O…)
I understand the point made that, along with Compute Edge, these are not the here and now. But they are the very near future, and surely need to be a consideration if not motivation for any investment in Fastly.
- Lowered guidance: "usage of Fastly’s platform by its previously disclosed largest customer (TikTok) did not meet expectations, resulting in a corresponding significant reduction in revenue from this customer”. "During the latter part of the third quarter, a few customers had lower usage than Fastly had estimated”.
I’ve already posted my initial thoughts on this (https://discussion.fool.com/well-i-was-expecting-raised-guidance…). While I don’t like how management have handled this, I feel like we might be missing something here - I would like to understand why. TikTok we knew was a risk, I could most likely accept a geopolitical short term impact here. The most concerning element for me is the usage impact of a ‘few customers’ in the latter part of the quarter. Understanding what is driving this usage impact seems absolutely integral in understanding what the run-rate is going into Q4, which is guided to be +18% sequentially. But we don’t know the why - yet.
The question is, for those who held shares after Q2, is this an overall net positive? For those selling, it suggests not.
Has the story changed? For me, I’m just not sure the information is there yet to make a final decision on this. I agree that the story has become more complicated, and I well understand the argument that it’s a red flag (especially given the usage false flag ahead of Q2 earnings), and that we can always sell out now and re-enter once we have this information. And why bother with the uncertainty. But to do that, perhaps it would be to make a decision because of the absence of information.
I am attaching a lot of importance on what management comments are going to be in the Q3 earnings call. If the answers are vague or signal to me a continued deceleration, I will mostly likely sell out of my full position. With all the uncertainty going into that, I asked myself whether I would buy my position right now? As really that is the same decision as holding it. I’ve thought about this and taken on board many of the comments, and have trimmed my outsized position heading into the call to one I’m more comfortable with. I was looking for an opportunity to top up Zoom after Zoomtopia, so that is where I reallocated to.
Maybe I’m overthinking this, but that’s in my name. I have felt torn between the actions of the great investors on this board, whose experience and knowledge I value a lot, and my own thinking above - and reached somewhere in between. Maybe I’m making a mistake holding onto my position at all (11%), and maybe I’ll learn that the hard way. But at least I’ll be learning