Long FSLY, for now as I’m still undecided on what to do. - Griz
I believe this statement perfectly reflects the lingering FSLY discomfort in most of these posts. Fastly threw us a curve last week, and I think the board has done a tremendous job working through it. The story has clearly changed even if opinions differ on exactly how much. It seems most of us have landed somewhere on the hold/trim/sell spectrum (any buyers here?). Ultimately, hindsight will make it clear what we should have done. It always does.
Rather than rehash the announcement itself, I thought it might be worthwhile to outline the thought process the led to my decision to sell. First, my initial thoughts on the news can be found here: https://boards.fool.com/a-couple-of-you-reached-out-on-fsly-…. Second, I agree 110% with every point Bear made here: https://boards.fool.com/fsly-and-updating-beliefs-34643625.a….
Like Saul, I tend to group my holdings by conviction level. As noted in my linked post, my conviction level on FSLY changed. I might not know the exact level yet, but I am sure it is lower. The question becomes do I have enough information to act on it?
Stealing Bear’s format:
Prior Belief – FSLY has an intriguing new product in beta. As I am waiting for that to hopefully kick in, the company is supporting itself with a core business at mid-to-high 50’s growth (using the prior guide with a reasonable beat and not last Q’s 62%). I know about the low enterprise growth and concentration, but FSLY seems to be managing it so far. Besides, the Signal Sciences acquisition should help here. The prior CEO moved to CTO, which seems to better fit his skill set. The new guy is green but seems OK otherwise. FSLY has a pretty attractive thesis.
Update – FSLY has an intriguing new product in beta. As I am waiting for that to hopefully kick in, the company is now supporting itself with a core business at low-to-mid 40’s growth (using the new guide with a lesser beat). That’s a big drop off. The low enterprise growth and concentration might be more of a concern than I thought. If nothing else, it puts more pressure on Signal Sciences contributing immediately. Fixing this misstep will be handled by a new CEO and a former CEO who prefers the technical weeds instead. This isn’t a terrible thesis, but it is one with considerably more risk.
My portfolio entering that fateful day looked like this based on allocation size:
PTON (top watch list name)
The second my FSLY conviction changes it becomes time to reassess its spot in my portfolio. This is the same process I used in June when my FSLY conviction rose high enough to add it to my portfolio in place of WORK. In this case:
FSLY vs NET – This comparison has been beaten to death, and they were close for me with Fastly being a step ahead coming into this comparison. NET recently followed its Birthday Week with Zero Trust Week. Between the two events, Cloudflare released somewhere in the neighborhood of 74 million new products and enhancements (give or take, of course). Meanwhile, FSLY shot itself in the foot and was surprisingly quiet with damage control. So, NET > FSLY.
FSLY vs DOCU – DOCU is trending strongly upward with next quarter almost certainly delivering 50%+ growth and favorable profitability metrics. Meanwhile, FSLY shot itself in the foot and was surprisingly quiet with damage control. So, DOCU > FSLY.
FSLY vs OKTA/TWLO – OKTA and TWLO are both mid-to-high 40’s grower with higher run rates than FSLY, more stable profitability profiles and MUCH more established leaders. I previously liked FSLY’s growth prospects better, but that advantage is no longer certain. In fact, TWLO just pulled off a big acquisition the market loved and might put itself back in the 50%+ growth category next quarter (hmm, I may need to revisit TWLO). Besides, have I mentioned that FSLY shot itself in the foot and was surprisingly quiet with damage control? So, OKTA/TWLO > FSLY.
That puts FSLY’s conviction level at the bottom of my portfolio and forces a showdown with PTON.
FSLY vs PTON – Peloton just posted a year of 99.6% growth with strongly positive EBITDA and cash flow. It estimates 99.9% growth this year (which will almost certainly be beaten) along with a stronger EBITDA margin. I fully acknowledge PTON selling consumer-based widgets makes it a bit tougher to follow and likely a lot more fickle than a software company. However, it also has an impressive subscription component growing 100% at close to a $500M run rate. FSLY is…well…something much more uncertain than it was before. So, PTON > FSLY.
Staying disciplined to how I am trying to run my portfolio, I have a decision to make right here. This reassessment just earned PTON a spot in my portfolio. Notice this development by itself is not just a FSLY decision but involves PTON as well. PTON just cleared my inclusion bar. That would not have been the case if FSLY had stopped higher up. Now the question becomes whether I want to hold myself to eight positions or increase to nine by say swapping some FSLY into PTON. After thinking about it, I decided to stick with eight. Once I make that decision, FSLY automatically exits my portfolio. It doesn’t matter whether I’ve got FSLY’s new market status exactly right. All I need to know is I no longer have enough conviction to own it in my 8-stock portfolio. Nothing personal Fastly, and I’ll gladly watch you from afar. That being said, don’t let the door hit you in the ass on the way out.
To be fair, this all happened VERY quickly during the first 30 minutes or so after market close Wednesday. I sold after hours immediately upon making the decision, giving me ~9% cash. Conveniently enough I had just finished my PTON breakdown, so I already felt good about its spot at the top of my watch list. I also implicitly trust much of the work done by others on this board on PTON’s behalf (isn’t crowdsourcing great?). My initial comfort-level blink on PTON puts it in the 5-6% allocation range. With PTON sitting at all-time highs, I wasn’t entirely sure about biting off a 5%+ chunk all at once. So, knowing I would double check my due diligence this weekend, I entered limit orders Thursday at 3%, 5%, 7% and 9% below the high just in case I could grab some a little cheaper. The first hit Friday, so I now have a 1.6% position to start. The other orders remain intact heading into Monday. I plan on filling out the position over the next day or two even if I end up buying a little higher. The remainder most likely finds its way into some combo of DOCU, TWLO and potentially another name or two.
I know this post trends more toward portfolio management than analyzing an individual company, but I do believe it is relevant to the FSLY topic at hand. I hope it helps. I know it helped me to write it out.
Hope everyone is having a good weekend.