A judge in Pennsylvania has rejected a request from three TikTok content creators to temporarily block a ban on the app set to go into effect Sunday night, which would bar new downloads from Google and Apple’s app stores in the US.
Looks like the ban will go into effect tonight. Ban is for SW updates and new downloads. The Chinese government is still considered the proposed TikTok Global Deal where Oracle and Walmart would own a stake.
FSLY, which derived 12% of its first half 2020 revenue from TikTok, has been volatile through this drama. The drama is continuing as China can still approve or reject the deal. Then the US administration can still approve or reject the deal. Trump has set a Nov 12th deadline for the security concerns to get addressed. If this deadline is not met, Trump has threatened to ban use of TikTok in the US.
But I think this is all a red herring as it pertains to the value of the FSLY shares. TikTok’s contribution to FSLY revenue was recently 12%. But less than 50% of that revenue is generated through TikTok’s US operations. So let’s call TikTok USA a 5% customer. FSLY is growing revenue at 50+% per year which calculates to 11% revenue growth per quarter (11% compounded 4 times is 51%). Loss of a 5% customers will be completely replaced in about 5 weeks! Is this really such a big deal? I think not.
I have been betting on FSLY shares (via options trades which I will not discuss in detail here because it is off-topic). With the uncertainty of the TikTok outcome and depressed stock price (presumably due to at least in part to the TikTok drama), there have been and still are opportunities to make trading profits. Even if that’s not your thing, the shares could have been bought on the cheap for the past weeks. With today’s ruling, the shares will probably drop again tomorrow. But there’s still a lot to be decided with respect to what happens with TikTok. If the shares drop into the $80s again tomorrow that still seems to a great long term buy.
The drama continues:
A judge has temporarily blocked an order from the Trump administration that would have banned TikTok from being downloaded from U.S. app stores.
At the end of the day on Sunday, the U.S. government could have forced app stores run by Apple and Google to remove TikTok.
But after a hearing on Sunday, Judge Carl Nichols of United States District Court for the District of Columbia, granted an injunction against that order.
The judge, however, did not block a much broader ban set to come into effect on Nov. 12 in the U.S., which could effectively make TikTok unusable.
Looks like TikTok has won a reprieve. This contradicts the story from this morning that the ban had been granted. The volatility in FSLY shares should continue as long as the uncertainty of the app download ban and the complete ban (currently scheduled to take effect on Nov 12th) hang in the balance. As I said before, I think that long term this is a non-issue for FSLY but in the short term the uncertainty makes FSLY stock more volatile and FSLY options more valuable.
I believe there are two diff cases. Earlier one was in PA, plaintiffs were 2-3 individuals who claimed their biz posting content on the app would be compromised. One you just posted is in DC, TikTok vs Govt.
Either ways, FSLY closes out the qtr with US customers intact, perhaps even increased because more people downloaded app in anticipation of the ban.
What is not being discussed is the ban in India which went into effect July 1. If I am not mistaken, India was the largest user base for TikTok by a factor of 4 vs US.
Good product + management will get past these short term issues and deliver.
Loss of a 5% customers will be completely replaced in about 5 weeks! Is this really such a big deal? I think not.
I think not but let’s not forget that this is a ban on new downloads - the 175 million of existing US downloads and 100m active users will still be able to use tiktok and utilise deployment of Fastly and contribute to ongoing revenues.
Clearly overtime without new users and with gradual smart phone replacements stepping up after events like Apple’s launch of its 5G phone (November?) then zero growth will move to accelerated attrition but 100m active users aren’t going to be lost in 5 weeks.
Of course there is a massive amount of uncertainty in all of this from every angle including: China’s eventual decision, non linear decision taking from the administration and interventions from the justice system, however what I would say is that the uncertainty holds more potential for an upside to the outcome than the downside.
Oh and I meant to say that the 100m active monthly users in the US is out of an estimated base of 850m active monthly users as of September 2020.
So effectively a total of 12% of the TikTok contribution is at risk and so really only 1.44% of Fastly’s revenue is at risk.
If there are 265m smart phone users in the US and 85m smart phones sold per year in the US then there’s an attrition of ~30% given a little market expansion in that number of new sales. That means there’s monthly attrition of 2.5%.
So in all probability 30% of 1.44% will be eroded in 1 year and 2.5% of 1.44% will be eroded on a monthly basis if new downloads are blocked from TikTok in the US.
Fastly will almost certainly not notice that at all and will probably be able to accommodate that even within its guidance!
Software Stack Investing’s Q2 recap quoted this from FSLY management during a conference call:
On the KeyBanc analyst call, they supplied more detail. For TikTok, Fastly provides both API and video delivery. Fastly deliberately limits the amount of video delivery that they take from any customer, in order to balance video usage with higher-margin content delivery types on their network. Management is confident they could backfill the video delivery portion of TikTok’s usage with some advance notice, as other customers would increase their video delivery. API usage, on the other hand, would be lost.
So it sounds like at least some of that 6% could be relativity easily recouped though existing demand from other customers.